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4 October 2017
Advocates of peer-to-peer lending often cite a multitude of benefits both for borrowers and lenders, noting that it is an inexpensive alternative to bank credit for a party looking for financing and more profitable option to get high returns on liquid assets for investors. The key factor behind these advantages is supposed to be an absence of any intermediary between a lender and a borrower as the whole transaction is performed directly between the parties, or peer to peer.
Focusing on the investment side of the P2P lending scheme, what are the true benefits and drawbacks of such a profit-making method? Besides, what does the collation of P2P lending with other investment choices show?
P2P lending versus shares
Benefits of P2P lending: P2P lending is an investment instrument with fixed rates, in other words every lender knows exactly how much money he/she will get on the loan provided to a borrower, which is unlike for the shares. Investment in the stock market means that a shareholder will have to constantly monitor the dynamics and movements in the stock value at the stock exchanges. In order to make a jump into the train at the right moment, a shareholder needs proper expertise, knowledge and understanding. P2P lending removes most of this fuss: being an investor does not require special knowledge or hiring a broker in case of insufficient experience.
Drawbacks of P2P lending: Investors providing loans on P2P lending websites usually cannot divest their money any time they need it as compared to the shares, which could be sold at the stock exchange whenever they want it. P2P lending does not provide any guarantees that a lender will get his/her returns in the least, say nothing of the loan amount itself. Thus, just as is the case with the volatility of the stock market where the share value may drop dramatically on the heels of some media reports about the global events or a company issuing the shares hold, P2P lending cannot ensure stability as it is tightly linked to future creditworthiness of a borrower.
P2P lending versus bank certificate of deposit
Benefits of P2P lending: P2P lending brings profits substantially higher than those accrued on certificates of deposit. Certificates of deposit are somewhat meaningful in terms of returns if an account holder deposits his/her money for a period of at least 5 years. In this case the interest will be up to 2.53%. If a customer decides to deposit money for one year, the interest will make up 1%. In contrast, even investments into the loans that feature very strict terms for borrowers (i.e. not risky loans and, hence, less profitable) may bring 500% bigger returns than certificates of deposit. With P2P lending an investor at the very least earns 5-6%. Besides, minimum amount for a bank deposit cannot be less than $1,000, while P2P lending allows investing as little as $25.
Drawbacks of P2P lending: Drawbacks for P2P lending as collated to bank deposits are almost similar to those indicated for shares. Investors risk losing all their money in case of the borrower’s default. Meantime, bank certificates of deposit are in most cases FDIC-insured for amounts under $250,000. Thus, if bank defaults, the government will repay all deposited money.
P2P lending versus precious metals
Benefits of P2P lending: P2P lending is not dependent on the market conjuncture unlike investments in precious metals like gold. Gold value may fluctuate based on the global economy development and the overall international situation. P2P loans bring fixed returns, as it was mentioned above, and, thus, an investor knows exactly how much he/she will earn after all. Besides, gold storage is not as simple as placing a credit card into the wallet. Gold requires special storage conditions, which means that an investor will have either to use the services of bank storages and pay extra money for the entire period of storage, or create a dedicated warehouse for the gold storage, constantly monitoring the conditions inside, because gold may lose its color or oxidize in improper environment. Investing in jewelry is even worse, as in most cases jewelry pieces may be sold only on weight basis at the current price per ounce. Meanwhile, the price of the jewelry includes the cost of workmanship, which will be disregarded if a consumer decides to sell it.
Drawbacks of P2P lending: P2P lending is not a tangible asset like gold. Investors may only rely on the solvency of a borrower and compliance of the P2P lending platform with its guarantees. A gold bullion is a gold bullion, even if it suffers some oxidation and discoloring. Customers may sell their gold at the times of acute need. It, probably, may not be referred to as earning, but it is a reliable way to save money for rainy days, unless a gold bullion is not stolen by burglars. P2P lending, on the contrary, may short-sell investors on a rainy day.
Exciting articles several times a month