Have you ever thought about lending money as a personal business? I don’t mean in the sense of illegal usury activities or becoming the local loan shark with brass knuckles kind either. Peer to peer lending, also known as P2P, is when two people set up a personal loan arrangement with a predetermined repayment schedule. If you ever loaned a relative or friend money, then you enacted a P2P loan in the most business informal sense. However, did you know you can make money with P2P lending?
How to Make Money With P2P Lending
In the digital age, P2P lending has more official connotation to it. P2P lending now refers to people lending and borrowing from each other through the auspices of a third-party online website service. With respect to the lender and borrower, the website handles the registration, evaluation criteria, processing, and repayment conditions.
So, instead of lending money to people you know locally, you can use a P2P lending website to lend money to strangers worldwide online. Of course, not based on altruism, but based on their registration profiles and the applicable interest rates instituted by the website. If you have $5,000 or $10,000 to spare, you could make some serious coin via interest depending on whom you lend to and through which P2P websites. Here are some things you should know before you get started.
Know Your Borrower
As with any business endeavor, the key to success is to know your clientele, demographic, or consumer. Most P2P borrowers have bad, low, or sub-average credit scores and just can’t get a traditional personal loan from a bank. For one thing, people who apply for P2P loans are looking for instant approval for the loan.
The FICO credit score of the average American is about 700, more or less. The minimum FICO credit score to be eligible for approval for a personal loan from a bank is about 740+. The higher the score, the better the chances of approval. Over 76% of Americans who apply for unsecured personal bank loans are rejected. More interestingly, of the 34% that are approved for traditional bank loans, only about 35% proceed to accept the loan.
Why is that? Some experts believe that such applicants balk at the available interest rates. The interest rate for most traditional bank loans can be as low as 5% or as high as 36%. Applicants with bad credit histories, histories of bankruptcy and delinquent payments can expect to pay higher interest rates. Also, applicants borrow money exclusively on the terms of the bank. It can take days, weeks, and even months to be approved for a personal loan from a bank.
Set Your Terms
As with all investing, the key to success, or a healthy ROI spread, is diversification. The minimum amount you can lend through most P2P lending sites is about $25, but you can lend out a few hundred, a thousand, or more at your discretion. You should carefully evaluate profiles and check applicant credit histories before loaning money through a P2P website. One bad loan usually requires a lot of good loans for adequate compensation balancing. Spread out the risk. Don’t loan all of your money to one or two applicants.
Spread out loans across 50 to 200 applicants if possible. Most P2P websites offer interest rates as low as 4% to as high as 36%. Just like most traditional personal loans offered by banks. Except that P2P personal loans can be released almost instantaneously through most sites. Applicants need to be employed and have a bank account. Most P2P lending sites automatically withdraw funds from borrower bank accounts on a predetermined schedule.
Know Your P2P Website
There are numerous P2P websites that you can lend money through safely and legitimately. These include Prosper Marketplace, Upstart, Peerform, Street Circle, Funding Circle, Kiva, and Lending Club. These are no small-scale enterprises neither. Lending Club, the largest P2P lending website on Earth, transacted over $55 billion in loans in 2017. For investors outside of the United States, the most popular P2P lending platform is currently Mintos.
Be Patient
Lending money as a business endeavor requires patience for repayment and for interest appreciation. Don’t view P2P lending as a get rich quick scheme, but as a long term investment strategy with diversified risk.
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Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.