How to Build Passive Income through Peer to Peer Lending
The ease at which we can spend money nowadays means many struggles to save the amount they need for a deposit or to sustain them later in life. There are some who are bucking the trend.
Many are attempting to support themselves through low management streams known as passive income. Peer to peer lending is one passive income stream that many have started to take advantage of. As of 2018, the current size of industry exceeds over £9 billion in total lending.
Step 1: Build a pot worth investing
It is perhaps obvious that to invest you will need some money to use. This is the hurdle that many people fall over before they’ve even started. The ‘pay yourself first’ mantra here is a great philosophy to follow. Essentially before you pay bills, expenditure each month you pay money into your savings/investments.
Putting it into a savings account with a good interest rate will mean you will benefit from compound interest before you take the step to put it into an investment account.
Step 2: Find a provider that suits your needs
Once you’ve saved up enough to invest it’s time to find the right peer to peer lender. Here are the top 3:
+ User-friendly platform
+ Offers best returns
– Is the riskiest platform
– long loan sale times
+Offers £100 bonus on new investments
+Large provision fund
-1.5% Fee to withdraw from the 5-year market
-Lowest returns
+ Longest running platform
+ Strong diversification
– 1% selling fee on outstanding loans
– £1000 minimum investment
Step 3: Diversify your portfolio
This step will depend on which peer to peer, provider, you go with, rate setter whilst offering a good interface does not allow you to lend to multiple businesses. This increases the risk of a bad debt seriously affecting your portfolio. To alleviate this many recommend diversifying your peer to peer investments across multiple platforms to benefit from the differences in the providers.
Step 4: Stay in it for the long run
Many novice investors will fall into the common trap of developing too short of an investing mindset when locking their money away. This is a mistake. If you withdraw your money too early you will not benefit from the compounding interest that will increase your funds further.
Reinvesting the interest you earn on the loans means you will see your balance grow rapidly. Exercise caution however as some of the platforms will automatically invest the interest for you, so if you are aiming to take money out of the account make sure you check your lending settings.
Following these four steps will put you well on the way to developing a sound passive income strategy. So long as you make sure you do your research and keep an eye on your investments you will be able to maintain a stable return.
Related Posts
RateSetter prepares to close the investing side of the platform →
MoneyThing enters administration →
Will a COVID vaccine improve peer to peer lending market? →
