Lesson 2: How Investing in Peer to Peer Loans Differs From Bond Investing

In this video we will provide practical answers on how investing in peer to peer loans is different from investing in bonds  and bond funds. We we will cover the following 4 areas of difference: Peer to peer loan payments, interest rates, default risk, and interest rate risk

This is video 2 of a 6 video p2p Lending Series.  Click here for the other free videos.

Open a Peer 2 Peer Lending Account and get started with as little as $25

Open a Peer 2 Peer Lending Account and get started with as little as $25

 How peer to peer loan payments work vs. bonds and bond funds. 

Peer to Peer Loans Bond Funds Individual Bonds
Payments Large Fixed Monthly Payments (includes principal & interest) , No Big Payment At Maturity Variable Interest only Payments, Must Sell Bonds To Get Large Lump Sum Fixed Interest only Payments, Large Lump Sum (Principal) Payment At Maturity

Peer to peer loans are similar to a mortgage, the initial debt and interest is paid off in fixed payments over time. At the end of the loan, there is no more principal remaining to be paid. This feature makes P2P loans very attractive to investors that want a consistent income stream.

When you invest in individual bonds, you will get every six months fixed interest payments. However, the face principal or face value of the debt is only paid off at the end, when the bond matures.

When you invest in bond funds, you will receive monthly payments of interest. However, those payments will vary in amount over time. To get a lump sum payment, you will need to sell your shares of the fund.

 

  Peer to Peer Loans Bond Funds Individual Bonds
Interest Interest Is Very High, with average rate being above 10% Low Compared To P2P Loans, Even High Yield Bond Funds Yield Under 10% Low Compared To P2P Loans, Even High Yield Bond Funds Yield Under 10%
Default Risk Very High, But Risk Can Be Reduced By Buying Higher Rated Notes Low Compared to Peer-To-Peer Loans, But There Are Funds That Are High Risk Low Compared to Peer-To-Peer Loans, But There Are Bonds That Are High Risk
Interest Rate Risk Low High With The Exception of Short Duration Funds Moderate in general when you buy and hold.

In some ways, peer to peer loans are riskier than bonds or bond funds. They have very high rates of default. Lenders are compensated for the extra peer to peer lending risks by receiving higher interest rates.

But in one important way, investing in peer to peer loans is less risky than bond funds. When interest rates rise, bond funds lose value. The amount of money you receive from a P2P loans will not be affected by rising interest rates. And because, Peer to peer loans are paid off quickly, you will not miss out on the opportunity to invest at a higher interest rate.

The next video in this series is about what type of P2P account you should open and which company you should  use. I will give you hint click on the link from Lending Club below.

Open a Peer 2 Peer Lending Account and get started with as little as $25

This lesson is part of our Free Guide to Investing in Peer to Peer Loans.  To continue to the next lesson go here.

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