How To Kickstart An Investment Portfolio With Peer to Peer Lending?
If you are looking to invest your money to earn high returns, it can be challenging to know where to start. Although stock and shares have a lot of profit potential, it carries a high level of risk, especially for the new or inexperienced investors. On the other hand, bank saving accounts and bonds may look like a safe option, but the interest rate they offer is not enough to keep pace with the inflation. As a result, new inventors are moving away from conventional investments and looking for options that do not involve banks or stock markets. One great alternative to traditional investments is peer to peer lending. You may already have heard about p2p lending but may not know what exactly it is and how it works.
Here in this article, we will discuss how it works and how new investors can kickstart a successful portfolio with p2p lending.
How Does P2P Lending Work?
In simple words, peer to peer lending is an investment platform that connects investors with the people who are looking to borrow money (borrowers). These platforms work online and play a role that would be generally played by building societies or banks in traditional lending. P2p platforms cut out the need for a middleman and make lending and borrowing easier. Due to this reason, both parties can access the competitive rates, which means borrowers can get loans at low-interest rates, and investors can earn better returns compared to the standard bank loans.
The platforms check the creditworthiness of all the borrowers to ensure that your investment is safe. Most platforms allow investors to choose the borrowers or loans they want to invest in. This way, you will have some control over your capital. The platforms handle all the processes from finding borrowers to transferring loans and getting the repayments. These repayments are the profit that you get from your investment. As an investor, you can decide to withdraw this profit or reinvest it to get the benefit of compounding interest.
What Are The Risks And Rewards Of P2p Lending?
One significant advantage of p2p lending is that it offers competitive interest rates and it carries a relatively low risk. These benefits make it an appealing investment option for beginners. The interest ranges from 3 to 6.5 % per annum. However, some investors state that they earn a double-digit return from the p2p loans.
It is evident that any form of investment that offers you high returns can never be completely free of risk. But if we compare it with the increased risk, high-profit stocks and low risk, low-profit bonds, we find that p2p lending offers a low-risk middle ground. You can diversify your investment across multiple loans to reduce the risks, so if a borrower defaults, you can continue earning profit from other loans. Some platforms also offer contingency funds to provide a cover in case of borrower default.
What Do You Need To Start Investing?
Like any other investment portfolio, you need a small lump sum amount to start your p2p investment portfolio. One good thing about p2p investment is that you do not need a considerable amount of money. The exact amount that you need to start varies from platform to platform. You need some time to manage your portfolio and choose the loans you want in which you want to invest your money. However, some platforms offer an auto-invest option that you can use if you do not have much time to manage your portfolio.
How Can You Get Best Possible Returns?
The key to making the best returns from your p2p investment is to keep your money invested for long periods. So we suggest that unless you are in need of money, you should not withdraw your returns and keep on reinvesting. If you keep your money in a bank savings account, it will gradually depreciate in value, so you should reinvest instead of withdrawing and saving it in bank accounts. In this way, you can make your money work for you and gain value over time. Furthermore, you can also open an Innovative Finance ISA (IFISA) account to take advantage of earning tax-free interest from peer to peer lending.
From the above discussion, you can see that p2p lending is an excellent way for you to kickstart your investment portfolio and earn high profits in a short amount of time with a relatively low level of risk.
