How P2P Lending Generates Higher Returns Than Traditional Fixed Interest Securities
With benchmark interest rates at all time lows in many of the major global
economies, traditional fixed interest securities, such as government
and corporate bonds, are being issued with much lower interest rates
and therefore yield much lower returns for investors, than during
times of higher benchmark rates. As economic growth continues to be
sluggish across the globe, benchmark interest rates won’t increase
much any time soon, which in turn makes fixed interest securities
rather unattractive from an investment returns perspective.
So, what can you invest in to generate high fixed interest returns as an
investor? The answer is peer-to-peer lending.
What is peer-to-peer (P2P) lending?
Peer-to-peer lending, also referred to as P2P lending, is a relatively new
financial innovation that has become increasingly popular since the
2008 financial crisis. After the financial crisis banks started to
massively decrease their lending activities. This lead to SMEs and
individuals looking at alternative options to borrow money. Out of
that peer-to-peer lending was born.
The way peer-to-peer lending works is that an individual or an SME
borrows money from various private investors, through the use of an
online peer-to-peer lending platform, such LendingClub
The investors, on the other hand, can pick their investments on these
platforms and receive a fairly high interest rate on their
investment. This is why peer-to-peer lending is attractive to both
borrowers and lenders (investors). It enables borrowers who are
finding it difficult to get a loan from a bank to secure the debt
financing they need, while investors can generate strong fixed
interest returns on their investments.
Why are peer-to-peer lending returns higher than most traditional fixed
Thereason why peer-to-peer lending investments generally carry higher
interest rates than government or corporate bonds is because
peer-to-peer lending is considered to be a riskier investment. This
is because you are lending primarily to individuals and small
businesses, which inherently carry higher credit risk than
governments, municipals or multinational corporations. However, no
research conducted on the matter has actually confirmed that
peer-to-peer lending has a higher default rate than bank loans or
The reality is that peer-to-peer lending platforms run thorough due
diligence on their borrowers before allowing them onto their
platform, which greatly reduces the credit risk for the investors.
Furthermore, as an investor in peer-to-peer lending you should always
spread out your investments over several peer-to-peer borrowers to
diversify your portfolio, to reduce credit risk even further.
Why you should allocate some of your investment capital to peer-to-peer
There are two main reasons why you should allocate a part of your available
investment capital to peer-to-peer lending. Firstly, you will very
likely generate higher annual fixed interest returns with your
peer-to-peer lending investments than with traditional fixed interest
securities. And secondly, it’s a great asset class for portfolio
diversification, as peer-to-peer lending has no correlation with
stocks and bonds. That means if the stock market or the bond market
decline, your peer-to-peer lending investment returns will not be