If something seems too good to be true, it usually is - but could the peer-to-peer (P2P) lending model turn this adage on its head for Irish investors?
Peer-to-peer lending may seem new-fangled but it has been around for a number of years and it's quickly establishing itself as an attractive asset class for first-time and experienced investors alike.
‘I have been investing in P2P lending for about 6 years now,’ said Marc van der Chijs, Vancouver-based venture capitalist, formerly a successful entrepreneur in China which is a world-leader in P2P lending. ‘It’s still one of the most interesting asset classes for new or experienced investors’.
Like any form of investment, P2P lending carries a level of risk. However, according to its experienced proponents, P2P investment actually has fewer risks than classical or traditional investing such as stocks and bonds because even on a small scale it can still deliver impactful returns. At a time when interest rates on savings accounts are veering towards 0%, P2P interest returns offer savers and investors an accessible way to make their money work harder.
If you’re dipping your toes into the world of P2P lending for the first time, it’s important to remember not to put all of your eggs in one basket. P2P is a great way to start investing for yourself but it also makes an excellent addition to any existing portfolio. It's an easy-to-understand asset class that can provide attractive returns.
It also offers you the opportunity to spread your investment quickly across a range of businesses and industry sectors. At Linked Finance our advice is always to diversify your loan book and lend smaller amounts to a lot of businesses, rather than large amounts to a handful.
‘I allocate a certain percentage of my investments to P2P loans, just like I allocate it to stocks, bonds and other asset classes,’ explained Marc. ‘P2P loans actually replaced most of the bonds I invested in, because of the returns, the diversification possibilities and the liquidity.’
Trading and investing can seem fraught with challenges for the uninitiated. Where peer-to-peer lending differs is that you don’t have to commit to huge amounts if you’d rather not - lenders on Linked Finance lend what they want and amounts range anything from from €50 to €2,000 on each loan request. Your also lending to the types of businesses you know and understand so it's easy to spot the safe bets, minimising risks and increasing returns.
Beyond the financial benefits, P2P lending also allows you to support businesses in your local economy, creating jobs and supporting Irish entrepreneurs.
‘If you read the P2P lending forums you see a number of people that are not just going for the high returns, but also because they want to help others,’ said Marc. ‘On many platforms you can drill down to the loan level and see who will get your money and what it’s used for, so you can really feel good about the loan you are giving someone.’
P2P lending is yet another example of how technology is transforming the world around us. In the same way that Netflix has changed the way we watch TV and Spotify has change the way we listen to music, Linked Finance and other FinTech platforms are reshaping the financial landscape.
‘I think it will become much more normal to invest in P2P loans for the average investor,’ explained Marc. ‘Once they realize it is safe and once they see how good the returns can be - as long as you diversify and don’t put all your money in just a few loans - I believe P2P lending will really take off.’