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Reasons to Consider Peer-to-Peer Lending, and One Reason Not To

In a low interest environment, finding a solid return is no easy feat. And while interest rates have ticked up somewhat, returns are still stuck near historic lows. That may be why peer-to-peer lending sites have become so popular.

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These sites bring together businesses and individuals who need money with investors who have it, creating a potential win-win situation for all involved. But before you invest, there are some things you need to know. Here are three reasons to add peer-to-peer lending to your investment portfolio – and one reason not to.

Reasons to Consider Peer-to-Peer Lending, and One Reason Not To

The Return is Far Above Average

If you invest your cash in a savings account, you are lucky to get half a percent in interest. Even if you lock you cash up for years with a bank CD, the interest rate you earn will barely keep up with inflation. Earning money on your extra cash is harder than ever before, but peer-to-peer lending can provide a much higher than average return.

Many investors turn to peer-to-peer lending because of its relatively high return. If you have spare money to lend, signing up for a peer-to-peer lending site could net you a significant chunk of change.

You Could Make a Real Difference in Peoples’ Lives

The individuals on the other side of those peer-to-peer transactions are there for many different reasons. Some are entrepreneurs anxious to crowdfund their operations. Others are inventors seeking backers for their great new products. Still others have fallen on hard times and need extra cash to pay off their debts and get a new start in life.

No matter what their reasons, the men and women seeking peer-to-peer loans need the help, and providing that assistance could change their lives for the better. And while peer-to-peer lending is not charity, giving those folks a boost will make you feel good.

There is Some Vetting Involved

Established peer-to-peer lending sites vet their loan applicants carefully, checking credit histories, reviewing applications and accurately communicating the circumstances behind each request. If you work with a quality peer-to-peer site, you can have confidence in the vetting process.

It is important to choose your peer-to-peer lending partner with care, since not all sites are equally reputable. So take your time, do your homework and learn all you can about the company before you invest your money or make any loans.

As you can see, adding peer-to-peer lending to your portfolio of investments can have some big benefits, from higher rates of return to the satisfaction of helping someone in need. Even so, peer-to-peer lending has its drawbacks, and it is important to proceed with caution. Here is one reason to steer clear of peer-to-peer lending sites.

The Risk Could Be Higher Than You Think

There are steps you can take to reduce the risk you take, but in the end peer-to-peer lending is still a gamble. Businesses and individuals often turn to peer-to-peer lending sites after being turned down by traditional lenders, and that lack of credit quality could lead to a higher default rate.

Peer-to-peer lending can be a solid investment, and a good way to earn a higher than average return. Even so, this investment is not without its risks, and peer-to-peer lending is not a substitute for savings accounts, bank CDs and other fully insured financial products.

Alternative investments have taken off in a big way, driven on by the power of the internet and the changing nature of the investment landscape. If you are thinking about adding peer-to-peer to your own set of investments, you have three reasons to go ahead, and one reason to steer clear.

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