Peer to peer (p2p) lending had a great year in 2010. Well over $150 million in loans were originated by the top two p2p lenders in this country, Lending Club and Prosper, the most ever. Tens of thousands of investors enjoyed returns in the double digits. Now, 2011 is shaping up to be even bigger. Here are the top 10 reasons you should jump on the bandwagon and invest in p2p lending in 2011.
1. CD’s are still paying less than 3%
According to bankrate.com, the maximum return you can get on a five year CD right now is 2.61% (for three year CD’s the maximum is 2%). Sure, your deposit is insured by the FDIC but there is a good likelihood that you will lose money to inflation before the five years is up. With interest rates at record low levels the best you can do with CD’s is simply protect your capital, you really can’t grow your nest egg.
2. The stock market is fickle
The stock market had a decent 2010, but with the memories of a disastrous 2008 still fresh on everyone’s mind, we all know the stock market can be fickle. Not even Warren Buffet knows what the market is going to do in the near future. There are some commentators saying that stock market returns over the next ten years will be sub-par.
3. You choose your level of risk
With p2p lending you can choose beforehand the level of risk you want to take. Whether you want to invest in people who have great credit and a large income for a modest return, or take on a higher risk for a potential higher return, you get to decide.
4. Investing in real people
One of the most gratifying things about p2p lending is that you can know exactly where your money is being invested. You are investing in your fellow Americans, most of whom are genuinely trying to get ahead in life. You can read their story and invest in real people. Help people consolidate their debts, start a business, or pay for a wedding. You get to choose who gets your money.
5. Avoid dealing with banks or Wall Street
It is generally accepted now that mismanagement at the big banks and the financial institutions on Wall Street was one of the main causes of the financial crisis that has affected us all. They made some incredibly poor decisions and showed a level of greed that was unprecedented. But the big bonuses have largely remained intact. With peer to peer lending you can earn a great return on your money and completely bypass these institutions.
6. You are contributing to the economic recovery
By investing in individuals and small businesses, many of whom have been rejected by the banks, you are helping to stimulate the economy. You are creating liquidity in the financial system and providing funding to people who might otherwise not have been able to obtain a loan.
7. Start with as little as $25
You don’t need to be a millionaire to start investing in p2p lending. If you forgo a week of Starbucks you can get started with the money you saved. You can then continue to invest in these small increments. Many mutual funds and banks require you to start investing with hundreds or even thousands of dollars.
8. Add diversification to your portfolio
Most financial planners preach the gospel of diversification. The belief is that by holding a broad range of asset classes you can minimize your downside risk. In theory different asset clases should not move up or down at the same time. This is mostly true except in rare cases such as the crisis in 2008, when just about every asset class lost value. It is better to diversify into completely unrelated asset classes and that is what p2p lending provides. It does not move up or down in correlation to any other investment class so it provides true diversification to an investment portfolio.
9. P2P lending is completely transparent
Do you have any idea where your money goes when you put it in a CD, savings account or mutual fund? Of course not. But with p2p lending you can see exactly where your money has been invested. Not only that, you can also see how all or any of the loans are doing whether you invested in them or not. Because they have to register with the SEC you can also see the financial health of Lending Club or Prosper by reading their SEC filings. Finally, if you have the time and energy you can download the entire loan portfolios and run your own analysis.
10. Earn 10% (or more) on your money
This is the bottom line for most p2p investors. The rate of return is better than you can get almost anywhere else. The average stated returns at Lending Club is 9.7% and at Prosper it is 10.4% (since they reopened in July 2009). There are people getting returns north of 15% and some people do even better than that. But even if you do about average for a p2p investor you are getting a great return that can allow your money to really grow.
I truly believe that p2p lending should be part of every investors portfolio. These are my top 10 reasons you should invest. I would love to hear what others think – please let me know why you invest in the comments.