Nicholas Harding is the CEO of Lending Works. In this article, he shares how business owners can boost their income using peer-to-peer lending.
As saving rates at the big banks remain low, many investors are struggling to find reliable, low-risk forms of investment that offer rewarding returns. Once-reliable investment methods, like government bonds and savings accounts, offer little in terms of value creation for investors, and that’s making it increasingly difficult for those looking for a low-risk way to reinvest their earnings and maximise their income.
With banks keeping rates low, many investors are now turning to peer-to-peer (P2P) lending platforms as an alternative to traditional methods. These schemes offer very competitive rates and the potential for predictable returns, without the high level of risk that comes with stocks and shares.
If you’re looking to boost your income with a new investment strategy, and want to see a better rate of return without taking on too much risk, then P2P lending could be the right choice for you. Here, I’ll explain how it works, what investors need to consider, and how you can create a solid investment strategy that will give you the best chance of boosting your income.
How does peer-to-peer lending work?
The idea behind peer-to-peer lending couldn’t be simpler. Unlike traditional lending and investment schemes (where borrowers acquire loans through a bank or building society), P2P essentially cuts out the middleman and allows lenders to find potential borrowers via an online platform, meaning that both parties can access better rates.
To start, you’ll need to sign up to a P2P platform, and decide how much you want to invest. You’ll also need to decide on an investment term: this is usually anywhere between 1–5 years, with longer terms offering better returns. Once a suitable borrower has been found, you’ll start to earn interest as they make repayments, usually on a monthly basis.
What are the benefits of P2P lending?
For many investors, the most appealing aspect of P2P is the potential it offers for competitive returns, especially when compared to other low-risk forms of investment like bonds or savings accounts. In fact, lenders can see returns as high as 6%, depending on the terms of their investment: that’s far higher than the typical bank rate, which in many cases won’t even compete with the rate of inflation.
Another key advantage is the relatively low level of risk P2P presents when compared to other forms of investment. Of course, no form of investment is ever completely without risk, but there are a number of safety measures which make P2P less risky than stocks and shares. Borrowers are vetted by the platform prior to lending, so while there’s no guarantee that they won’t default on their repayments, you can expect every borrower to be creditworthy. And, because your investments will be spread across a diverse range of different loans, any losses will be cushioned if one of your borrowers defaults. Some platforms will even have financial safeguards and reserve funds in place to help protect their investors.
What to consider: creating the best investment strategy for you
When creating a P2P strategy, there are two key things you’ll need to consider. The first is how much you can comfortably afford to invest, and for how long. Remember, you’ll see better returns with a longer investment term, especially if you keep your money invested for the full duration, so think carefully about how long you’re prepared to wait.
You’ll be able to access your earnings at any time, and you can even withdraw your full investment amount if you need to. However, you’ll usually be charged a fee for this and this option will only be available if there is another lender available to replace you. So, if there’s any chance that you’ll need to access your entire portfolio before the term ends — to reinvest in your business, for instance — then you’re probably better off choosing a shorter term.
Lastly, you’ll also need to think about when you plan to withdraw your earnings, and what you’ll do to maximise your profits. Some platforms will allow you to take out your earnings as you go, but you can also opt to reinvest these, which will help to maximise your profits in the long run. I’d always recommend keeping as much invested as possible, as this will help you to see the best returns.
If you’re looking for a low-risk investment that will offer better returns than the paltry rates currently offered by the major banks, incorporating P2P into your portfolio could be a great option. Consider the points I’ve outlined above, and do plenty of research to make sure you know exactly how much you can afford to lend. Once you’ve formulated a clear investment strategy, you’ll be ready to start making the most of the competitive rates that P2P can offer.