Peer-To-Peer Lending As An Alternative Investment

I've always been a bit uneasy with traditional lending and borrowing. I've been on both camps and everything basically hinges on trust. The first part of the transaction to occurs when there's a sufficient level of trust on both parties.

The uneasiness comes about when the second part of the transaction which is the final settlement didn't occur as it was agreed upon. Usually, the fault is on the borrower.

Nowadays, the sophistication of technology has created systems that no longer require for you to trust the other party in order to trade with him/her.

Peer-to-peer has been modernized through online marketplaces and platforms that directly connect lenders and borrowers across the globe. From the lender's view point, it can also be an investment.

Image Source

How Does It Work?

A return on investment(ROI) is an essential part of an investment. This normally comes from the interest rate set by the online platform and agreed upon by investors.

The whole process on how it works generally looks like this:

• Borrowers apply for loans on the P2P platform with their information.
• The platform analyses their information and assign an interest rate based on their risk grade.
• Based on their risk tolerance and return expectations, investors choose the loan they'll want to fund and release it via the platform.
• If borrowers accepts, they will repay the loan with interest over the stated amount of time.
• Investors receive the payment weekly or monthly.

The whole process seems flexible enough to accommodate a good range of preferences. It can be personalized to a large degree and there are little variables involved. But like any investment, the rewards comes with risks.

Risks And Rewards

The main risk is in not receiving back one's investment. Modernity didn't change the fact that the borrower may be unable to repay back the loan unfortunately.

This can happen in an event of financial difficulties. The investor will have to wait longer to get the funds back if it occurs. The likelihood of this is a bit above normal.

The second one isn't necessarily a risk but a drawback. It's a standard procedure to lock funds for a certain period of time. It could be months or sometimes years. During that period, the principal is virtually unavailable.

It's peer-to-peer only in saying because technically it doesn't seem so. The platform that is facilitating the whole process is an intermediary.

And this is were the third risk lies, these online platforms which are relatively new are usually not insured. They could go under taking along your investment with it.

Image Source

But to do justice to p2p lending, we also have to look at the attractive rewards. The reason why it is attractive is because of the relatively high returns compared to traditional investments. A popular lending platform like Mintos has an average interest rate of 12%.

Like the second one on the risks, this one too isn't necessarily a reward but an advantage. As alternative investment, p2p lending has a low correlation to other investments. This makes it a good option for diversification as it can perform well when other investments are down.

Final Thoughts

From an investment point of view, p2p lending is seemingly a good option as an alternative investment, especially in the short to medium term. It trumps traditional investments in some aspects.

However, the risks that comes with it has a big downside that makes it a bit unattractive in the long term. Even as an alternative investment, I feel there's too much to worry about what if this or that happens. What do you think?


Thanks for reading!! Share your thoughts below on the comments.