There are several ways of generating passive income, each of which has its own benefits and drawbacks. One means of earning passive income is through investing in peer-to-peer lending.
If you’re interested in getting started with peer-to-peer lending, it helps to have a solid understanding of what it is and how it works. Here’s a guide to peer-to-peer lending and passive income.
What Is Passive Income?
Before we talk about how to use peer-to-peer lending to generate passive income, let’s define passive income. Passive income is money that comes from investments, properties, or the sale of a product, whether digital content or physical item. It’s a type of income that requires little or no daily effort to maintain.
Passive income can be generated, as stated earlier, through various means. For example, you can earn passive income by investing in certain financial products or by starting businesses to sell products of your own. Once those businesses or financial projects become successful, they generate income with a minimum of effort on your part.
A few examples of passive income include: dividend stocks, rental properties, content, private equity, and peer-to-peer lending. Regardless of which you choose, the concept stays the same: you’ll generate money without much additional effort on your part.
What Is Peer-to-Peer Lending?
Next, let’s talk about peer-to-peer lending. Peer-to-peer lending is an alternative to traditional financing. With this type of lending, instead of borrowing money from a bank, people turn to fintech services funded by investors like you. These platforms allow you to lend money to an individual or a company of your choosing. The method of payment is agreed upon by both parties and is usually made in monthly installments.
The reason this type of financing is profitable for investors is because the borrower pays back the loan with interest. That interest, in turn, serves as a passive income source for the lender/investor. In the past, peer-to-peer lending simply meant borrowing capital from your friends and family. Today, fintech platforms allow you to generate income by lending money to individuals all over the world.
What Do I Need to Get Started With Peer-to-Peer Lending?
If this sounds like something of interest to you, then you might want to consider trying peer-to-peer lending (P2P lending) yourself. There are two things you need before starting P2P lending: a financial account and capital. Now you’re ready to choose a P2P lending platform.
To get the biggest return on your investment, it’s very important to choose a reputable platform that has a history of strong returns. This helps ensure that you’re able to earn money via interest without putting your capital at serious risk.
What Are the Top P2P Lending Platforms?
There are numerous P2P lending platforms out there. A few of the top choices include:
Prosper: this platform has thousands of live offers at any given time.
Solo Funds: this is a community-driven P2P lending platform.
Mainvest: this platform is centered on pandemic recovery, offering investors the opportunity to lend money to small businesses across the country and get paid back with future revenue.
There are plenty of other options. Conduct thorough research before signing up for any platform. That way, you’ll know you’re choosing a platform that you like and feel comfortable with.
How Much Capital Should I Invest in P2P Lending?
Once you choose which platforms and opportunities appeal to you the most, it’s time to set up your account and start earning money. Whereas your savings account may let you start earning passive income with any investment amount, P2P lending platforms have minimum capital requirements. You’ll have to make an initial investment to start earning cash.
Just remember, the amount you invest has a direct impact on your returns. In other words, the greater your initial capital investment is, the greater your overall ROI is likely to be. However, while bigger investments mean higher returns, don’t invest money can’t afford to lose.
Think about how much capital you’re comfortable having unavailable before committing to P2P lending. Even though the returns can be strong, it takes some time to earn your money back. Make sure that you’re prepared for that money to be tied up for a while before you can reap the rewards.
How Do I Manage Risk with P2P Lending?
As with any type of investment, P2P lending involves some risk. For one thing, you’ll be lending money to individuals rather than financial institutions. Without the same securities and background checks as traditional lending, you could increase your risk of losing your investment.
While most P2P platforms help protect your investments and reduce risks through legal contracts, they’re not guaranteed. You still have fewer assurances, less borrower information, and fewer protections. However, there are still some pretty big benefits to sing this type of lending.
For one thing, with P2P investing you have agency in who you choose to fund. This means it is possible to obtain substantial returns out of this type of investing. A few other benefits include: easy connection between lenders and borrowers; simplified processes, easy-to-use interfaces, and risk management support.
Should I Start Earning Passive Income with P2P Lending?
Peer-to-peer lending can be an effective way to start earning some additional cash. And with this guide, you should have the tools and resources to do so.