Passive income + Helping others
Low (or <3%)
Peer-to-peer lending connects borrowers directly to lenders (investors), who loan money to qualified applicants. Peer-to-peer lending has three competitive advantages: First, it enables more people and businesses to get funding. Second, by cutting out the bank middleman, peer-to-peer lending allows investors to pocket more of the interest paid by borrowers. Third, peer-to-peer lending can provide other benefits, such as the feel-good benefit of knowing your money is helping another person or small business thrive.
Did you Know
Peer-to-peer lending platforms began popping up around 2006 with the launches of Prosper and LendingClub. As of 2022, the industry is nearing a market size of $1 billion and is expected to grow by 31% annually over the next four years.
By cutting out intermediary financial institutions and connecting borrowers directly to investors, this form of lending has created loans that are often more efficient, more accessible, and less costly than traditional loans.
While P2P loans, as an asset class, are correlated with some macroeconomic trends—particularly unemployment—research has shown a very low correlation between P2P loans and other asset classes.
It’s possible to access a much higher rate of return than is currently available from other investments, such as deposit accounts or bonds.
You can choose the level of risk you’re prepared to accept in terms of the profile of the borrowers you lend money to.
Some sites have contingency funds to protect investors if borrowers default on loans.
Reasons to Invest
There's always a risk that a borrower will default on their loan. If they don't repay their principal, you lose your investment.
The lending investments with the highest returns are on loans with high interest rates. These types of loans are usually offered to borrowers with questionable credit, meaning the higher the potential return, the more risk you're shouldering.
Different states have varying laws regarding peer-to-peer lending, so certain lending investments might not be available to you depending on where you live.
How You're Taxed
Profits earned from P2P Lending are taxed at ordinary income tax rates. This means that profits are added to your total income for the year.
You can receive income from P2P lending tax free if you invest using certain accounts.