2 min read

Is P2P Lending A Good Investment?

So, is it a good investment? Well first, let’s look at the rate of return for these platforms.

Take the P2P lending platform Prosper, for example. They rank their borrowers from low-risk to high-risk, and their estimated rates of return are between 3.6 to 13.9 percent. But if you look at the fine print, it makes it clear that you have to do two things if you want to get those 13.9% returns.

1) Make some big assumptions about loan repayments

2) Invest in the most aggressive loans with the highest defaults

Not great, even for a potential 13.9% return.

Now let’s look at Peerform, another P2P platform. This site doesn’t even give estimates for its returns. Instead, it says that there are “compelling risk-adjusted returns” for investors. What you can see from these examples is that it’s actually quite hard to discern what the actual returns are.

So what do I think about P2P lending as an investment, considering all of the pros and cons I’ve covered? Personally, I don’t think it’s a good investment, particularly compared to how Amon and I like to invest. Just look at Prosper: It requires the maximum amount of assumptions and risk for only 13% returns. To me, it just isn’t worth it.

After all, we’ve made more than 13% returns from investing in index funds and ETFs. So it’s hard for me to look at these lending platforms and consider risking all of my money when I could invest more and get higher returns for less risk.

And if you are willing to take on high risk for high returns, why not just invest in the stock market? At least with individual stocks you can look behind a company’s fundamentals and financials and get a real sense of potential returns, which you just can’t do with P2P lending.

As with any type of investing, this is just my opinion. I highly recommend that you go out and do your own research because it’s very likely that our lifestyle and investing needs are different. You should make a decision about P2P lending based on the information you find, and how it fits with your investing style.