You may have heard a friend or family member say that they’ve made upwards of 10% on their money through an innovative new investing idea, P2P lending. But did they tell you about the risks? Many people fed up with low interest rates at banks are turning to P2P lending which can easily beat a traditional savings account, but not without risk. Financial planner and teacher Rob West weighs the pros and cons. 
<ul><li>P2P stands for “people to people.” This is where investors make unsecured personal loans to individuals and businesses. It’s not unusual to get average annual returns of 7 to 11%. But make no mistake: if you take money out of your savings account and invest P2P, you’re no longer a saver but an investor, and all investments carry risk.</li><li>Here’s how P2P lending works. You want to borrow money. You go to a P2P website and fill out an application. The site then gives prospective lenders that basic information, plus the loan amount and purpose and an assessment of the borrower’s credit worthiness. But let’s say you're the lender. You go to the site looking to invest. You look through the information provided by borrowers and choose the loan or loans you want to invest in that could be all of a loan or just a part of it. Borrowers are usually limited to around $35,000 for what becomes an unsecured personal loan. Terms usually run from 3 to 5 years.</li><li>Credit worthiness. This is based on several factors: (1) the borrower’s credit score, (2) income to debt ratio, (3) the amount and purpose of the loan, and (4) the term. All of these values are then converted into a single number (usually from 1 to 10 or so) and this indicates the risk to the investor. It’s also used to determine the interest rate—the riskier the loan, the higher the interest rate and the higher the potential return.</li><li>P2P sites have many of the same credit requirements as banks. For example, they won’t accept borrowers with a credit score below 600. The average is around 650. Also, these sites won’t accept applications from borrowers with a recent bankruptcy, judgment or tax lien.</li><li>There’s the option to invest in just a piece of a loan. You’re actually buying “notes” or shares of a loan and you can do it in denominations as low as $25. So you can dip your toe in the water without having to put a lot of money on the table. And one more advantage. The P2P site handles the entire administrative end of the loan like underwriting, closing, distributing the proceeds and collection—all that for about a 1% management fee.</li><li>P2P sites can be searched for online. But the the two biggest ones are Prosper Marketplace and Lending Club. Between them, they’ve issued more than $22 billion
in loans.</li><li>Finally, there are risks. These loans are unsecured—there’s no collateral behind them that you could go after in a lawsuit. It’s entirely possible for a borrower to default on a P2P loan, meaning, you could lose all of your investment. Of course, that’s why the potential returns are so much higher than with a savings account at a bank. Also, P2P loans are not insured. If a bank goes under, your savings are insured up to $250,000 by the Federal Deposit Insurance Corporation. Not so with a P2P loan. You could lose everything.</li></ul>Here are some questions we answered from our callers on this program:
<ul><li>I need encouragement to learn to trust the Lord in all things, particularly my future and finances. What hope do I have?</li><li>Can I contribute to a Roth 401(k) and a Roth IRA within the same year?</li><li>Should I take out a home equity loan to have a line of credit…to have some liquid income (basically, I’ll be funding income through debt)?</li></ul>Ask your questions at (800) 525-7000 or email them at <a href="mailto:questions@moneywise.org">questions@moneywise.org</a>. Visit our website at <a href="http://moneywise.org/">moneywise.org</a> where you can connect with a MoneyWise Coach, purchase books, and even download free, helpful resources. Like and Follow us on Facebook at MoneyWise Media for videos and the very latest discussion! Remember that it’s your prayerful and financial support that keeps MoneyWise on the air. Help us continue this outreach by clicking the Donate tab at the top of the page.

FaithFi

Faith & Finance is a daily radio ministry hosted by Rob West. The program offers a practical, biblical and good-natured approach to managing your time, talents and resources.

Faith & Finance with Rob West

You may have heard a friend or family member say that they’ve made upwards of 10% on their money through an innovative new investing idea, P2P lending but did they tell you about the risks?  Financial planner and teacher Rob West weighs the pros and cons.

P2P Lending

FaithFi | Oct 9, 2020

Show Notes

Where Faith Meets Finance

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