In our last blog post, we discussed Peer-to-Peer loans, and whether they were a viable option for borrowing money. Today we're looking at it from the opposite perspective, and determining whether peer-to-peer lending is a good investment.
Advantages for Lenders
- You can set whatever interest rate you want for your own money. The lower you set it, the more likely people will borrow it.
- You're likely to get better interest rates than traditional bank or building society savings accounts.
- It's a way to become an investor without having to become a financial expert.
- Social lending stimulates the economy.
Drawbacks for Lenders
- The borrower may not pay you back. Although it will affect their credit rating if they don't, you have no real guarantee that you will be paid back in full or on time.
- While the concept of lending money socially is not new, the specific business model used by these websites is relatively new, and so it's difficult to determine what could go wrong. If people find a way to exploit the system, or if a change to financial regulations makes this type of business unprofitable, who can say what the future will hold for this budding niche industry.
Is it safe to lend?
There is always a risk that the borrower will default on the loan. Often the risk of not receiving your money back is low as your money is split between several different borrowers, so if one defaults you can still recover the majority.
Some companies have a bail-out fund to pay out money to lenders who are not paid back by borrowers, but these funds are not Government backed.
If you're looking for a simple way to invest your savings at risk for profit that isn't over-burdened with paperwork and complications, social lending websites can help. You can also use Money Dashboard's money manager for free to stay on budget and make sure you don't overspend your remaining cash.