The rewards of peer to peer (p2p) lending are higher than I can achieve with any of my current investments. I would like to start funneling some of my available investment money to p2p.
This is a very new concept for me. This is what I have learned so far. P2p lending is also know as social lending because it uses internet based lending sites to match people with money with people who need or want money. Sort of like Match.com or Plenty Of Fish.
The loans are unsecured meaning there is no collateral (houses, cars or boats) to back up the loan. If the borrower defaults then there is no hard asset the lender can seize in lieu of the cash payments.
Borrowers that are at higher risk of defaulting are charged a higher interest rate. Lenders can choose riskier investments with high risk borrowers and possibly earn a high rate of return if the borrower pays. They risk losing their initial investment if the borrower defaults.
You can choose lower risk borrowers, people who are less likely to miss payments or default, but your return (interest rate earned on the loan) is lower.
There is a fee charged to both the borrower and the lender. The p2p company makes a profit regardless of the outcome of the transaction. The money is exchanged through the company. The borrower makes payments through the company to the lender.
Just like online dating services the borrowers and lenders don’t have to give their real information to each other. The p2p lending company knows your real information but names and social insurance numbers are not shared between potential suitors – just like E-Harmony. Potential borrowers have to complete an online form for credit purposes. This is how the p2p company decides the borrowers risk level.
The p2p companies are responsible for screening borrowers and attempting to collect loans that are not being repaid.
I think that p2p lending must attract people who are not succesful at getting loans at regular institutions. This is the risky part. If the borrowers can’t get money from an old school bricks and mortar bank why should I loan money to them?
I am looking for advice or links and personal experiences with p2p lending sites. I have found so much good information about American p2p lending but nothing that looks promising or safe in Canada.
I could quote Thomas Jefferson and say “With great risk comes great reward”. But instead I will quote Kin Hubbard “The safe way to double your money is to fold it over once and put it in your pocket”.