P2P Industry Introduction: 4 out of 7
Do you want to be the boss of your own financial situation and make money by being an investor? The goal of this series of articles is to introduce you to P2P lending & crowdinvesting and to help you decide if this asset class makes sense for your investment portfolio!
P2P Lending Regulatory Reality was the previous post of the series.
If you are considering P2P lending as an investment option for your money, it is important to understand both the benefits and risks of this asset class. Only then you can make an informed decision as to either crowdinvesting is a good choice for you.
In order to give you the positive perspective, learn about some of the key benefits of P2P lending.
Simple and Fast Online Investing Experience
The entire process of P2P investing takes place online. That’s everything from completing the paperwork to investing, to receiving income payments. There’s no need to go to a physical location, or even to make lengthy phone calls. You simply sign up on the P2P platform, transfer funds to your account, select your investments, and begin receiving monthly payments.
Easy Investment Diversification
When you invest in a P2P platform you get many diversification options in just one place. With just one product (loans) you can spread your risk between different geographies, maturities, loan types, loan originators and so on. This is very convenient and easy. With bonds and equities you also get the diversification, however, without financial knowledge it is hard to decide where to invest and there are higher risks.
High Interest Rates
Among the most attractive features of investing with P2P platforms are the high interest rates offered. We currently live during a era of low interest rates and when money sits in the bank account, you might even lose money in real terms, since inflation is higher than nominal interests in the most developed world. In Europe, this problem is apparent: average inflation in 2018 in the EU calculated by Eurostat was 2.2%, while the average interest rate for new deposits in Europe was 0.43% (reference).
Low Cost Investing
Most of the P2P platforms in the market allow savers to invest their funds free of charge. Usually there are no fees for opening an account, depositing funds, investing funds or withdraw funds. Even P2P platforms that present costs for some of their operations are a low cost investment option when compared with the costs of investing in traditional financial assets.
Democratization of Investing
Not everyone can become an investor. Surprisingly, there are high barriers to entry. These barriers are contributing to inequality. The rich are getting richer and the poor are getting poorer. Usually, if you want to have a trading account, you need to deposit quite a large amount of money. If you want to delegate your money to an investment professional, it is very costly too. With P2P platforms, however, these barriers are so low, making them virtually nonexistent. Most of the platforms offer minimal investment starting from as little as €10 and don’t charge any fees, making it one of the most accessible investment tools currently available in the market.
Control and Choice
When you become a client of a P2P platform, you get access to the universe of loans that the company has listed. You can browse loans, filter the offerings in accordance with your investment criteria, such as the loan originator, borrower country, desired interest rate, and maturity date. You are in charge to decide where to invest and how much. No investment decision will be made without your instruction.
Regular Income Payments
When you invest in a certificate of deposit, you don’t receive any interest income until the certificate matures. If you invest in a bond, your interest income will be credited quarterly or semiannually. But when you invest in P2P loans, you can receive payments every month. This makes them perfect for generating a regular income source.
P2P platforms not only facilitate the financial inclusion investors, but also the access to funding for individuals and businesses excluded by the traditional financial sector. Very often P2P platforms offer investment opportunities from loan originators that issue microloans, who help to eradicate poverty. In some developing countries, access to finance is very limited and microloans are helping local economies to growth. Some might think that relying on microloans may cause trouble for populations in financial stress, but the empirical research suggests a positive impact.
Sense of Community
P2P investors do have a very strong sense of community, communicating with each other on a variety of specialized forums. When you encounter an issue or have a question raised, you can publicly discuss it on social media and even get a quick response from the P2P platform itself.
Learn about the Risks of P2P Investing (P2P Industry Introduction: 5 out of 7)