Passive income represents a way an individual can make money without doing any work, such as through dividend payments. There are various other sources of passive income and peer to peer lending is one that has gained popularity. It is a type of portfolio income that provides individuals with interest on their investments.
Peer to peer lending is exactly what its name states- lending money to peers. It is also referred to as a micro loan. Individuals who want to either lend or borrow use a service like Lending Club. Borrowers submit loan requests and lenders bid on funding a portion of a loan at a certain interest rate.
Micro loans provide investors with several benefits in the form of interest rates, diversification, and helping others. The interest rate on a micro loan exceeds that of a high yield savings account or CD. It gives an investor the ability to earn returns of between eight and fourteen percent. Investors can select which loans to bid on, allowing them to add diversification to the investment portfolio. The intrinsic satisfaction of being able to help someone who may not qualify for a traditional loan is another form of reward.
With these benefits come the drawbacks of micro loans of not being insured, having limited availability, and requiring ongoing maintenance. The money invested to fund these loads is not insured by the FDIC so the investor is taking a risk that the money will not be repaid. In the U.S., regulations limit the availability of these loans. This type of loan also requires more ongoing maintenance than a CD or high-yield savings account.
Peer to peer lending offers benefits for all involved in the process. The investor is able to get a higher rate of return than with traditional investments, the borrower obtains the funding needed, and the peer lending group receives a percentage of the transaction amount. An investor should compare the disadvantages of micro loans to the benefits they provide.
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