Hey everyone, thanks for joining me for this week’s Finance Talk with Josh! I’ve been seeing a lot of peer to peer lending in the personal finance blogosphere lately, and noticed several questions being asked in comments on blogs and social media. That being said, today, I figured we’d go over these questions and I’d give you the best answers I possibly could. So, without further ado, let’s get started!
Question #1: If the peer to peer lending industry isn’t regulated, doesn’t that mean it’s too risky for my investment?
Answer: Well, not necessarily. Although the peer to peer lending industry has no governmental oversight, it is regulated by what investors and borrowers are willing to accept. That being said, as with any industry, there are great options, and there are horrible ones. It’s up to you to choose one of the better options. Before getting involved in the process, I strongly advise doing your research to figure out which companies you can trust. Personally, I’ve found Prosper to be one of the better options out there. You can start your research by reading my review of Prosper here.
Question #2: Who exactly am I lending to?
Answer: Peer to peer lending means just that, you are lending to one of your peers. However, when we think of peers, we think of friends and family that we see on a regular basis. That’s obviously not the case here. In peer to peer lending, you lend money to consumers that want to side step the bank in their borrowing process. Depending on which platform you choose to use, you may or may not be able to see much about the person you’re lending money to. That’s one of the reasons I like Prosper, you can see things like credit scores, debt to income ratio, and more to help you decide if funding a loan would be too risky. When considering peer to peer lending as an investor, you should think about the credentials you will accept from borrowers.
Question #3: I’ve heard it takes forever to get paid back, is that true?
Answer: That really depends on the size of the loans you fund. Personally, I like to fund tons of smaller loans rather than one big loan for this reason. If you fund one big loan, all of that money is sitting with one consumer who will be making small, monthly payments. Unfortunately, that type of loan would take quite a while for a consumer to pay. However, if you fund tons of small loans, you will be sure to get your money back quickly.
Since we’re on the topic of funding several small loans, I figured I’d share one more benefit to doing so. As with stock market investing, when it comes to peer to peer lending, you should remember that diversification is key. By funding several small loans, you won’t be too concerned if one of your loans goes into default and you lose a few bucks. However, if you fund one big loan and it goes into default, you stand the chance to loose everything! No matter if you’re investing in the stock market, or you’re investing in your peers, you should always make sure your profile is diverse.
Thanks For Reading!
Well, that’s all for today everyone, come back next week for the next Finance Talk! ‘Till then, I’ve got a question for you! Have you ever tried peer to peer lending as an investor? If so, how’d it go? If not, is it something that you’re considering?