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How Millennials Are Making Money From P2P Lending
Among politicians, advertisers, big companies and brands, the biggest buzzword by far these days is ‘Millennials'. But what are Millennials and how are they making money from peer-to-peer (P2P) lending?
Are you a Millennial?
Loosely speaking, you’re a Millennial, also known as ‘Generation Y', if you reached adulthood on or after the year 2000. Most are born between the early Eighties and the early Noughties.
As those in the previous ‘Baby Boomer' generation steadily retire, Millennials now make up the biggest part of the UK's workforce. This explains why no successful business can ignore this group and your huge spending power.
What makes Millennials different?
While you and your best friend from school are not exactly alike, you share one key feature: you are the first social group to grow up entirely in a digital age. As a result, most Millennials are ‘always connected', spending many hours a day online and, in particular, using social media via smartphones.
Perhaps the biggest frustration for many Millennials is that your working lives are very different to those enjoyed by previous generations. In this post-crash era, your financial security can be precarious, undermined by minimum-wage jobs, zero-hours contracts, inferior pensions and high student debts and house prices.
One big problem for big business is that Millennials dislike traditional marketing methods and are suspicious of corporate motives and messages. Instead, many Millennials prefer authentic experiences and value feedback from your peers over old-fashioned advertising. Also, as the first truly online generation, Millennials are highly technology-savvy, but perhaps less so with personal finance!
Why P2P lending attracts Millennials
Although investing is generally considered to be something for older people with lots of spare cash, around one in nine people lending through Lending Works* is a Millennial, and some other P2P lending sites have similar demographics. I think there are several reasons for this.
As digital consumers, many Millennials expect everything to be done online.
This is where P2P lending has a distinct edge over traditional investment methods, because the entire industry was born and evolved online. P2P lending started out in March 2005, with the launch of first-mover Zopa. Twelve years later, lenders can now invest in P2P loans across more than 80 different UK-based websites, giving Millennials plenty of choice.
What's more, you can start P2P lending within minutes and a few clicks. That’s a much less cumbersome approach than traditional financial planning, which can involve hours of meetings with qualified advisers.
As an added bonus, it also cuts out the paperwork and form-filling associated with old-school investments.
What's more, you can monitor, manage, adjust and reinvest your loans in real time, putting you in control.
As well as being quick and easy to do, I believe that P2P lending also appeals to many Millennials' sense of social justice and ethics. By lending your money to individuals and/or small businesses, you can feel that you are changing the world by taking away power from banks, while also helping those businesses and individuals who need loans.
Four more reasons for Millennials to try P2P lending
Before you consider why to do P2P lending, you should consider why you shouldn’t. Whether you’re a Millennial or not, all the same risks apply when lending through P2P and you need to feel comfortable with those risks before you begin.
We’ve covered the risks repeatedly on 4thWay. If you’ve not seen that coverage, as a starting point, please take a look at The 12 Key Peer-To-Peer Lending Risks Risks.
After you’ve got something of a handle on those risks, here are some of the reasons why you as a Millennial might lend:
1. Low minimum lending limits
Cash-strapped Millennials will be pleased to learn that you don't need to be rich to try P2P lending. That's because it's possible to ‘micro-invest' in P2P loans with as little as £1, as the following table demonstrates:
|P2P lending website||Minimum lending amount||Quick Expert Review|
2. Higher interest than from cash deposits
Baby Boomers (born from 1946-1964) will remember the ‘good old days' when they earned double-digit interest rates in savings accounts. Sadly, the same can't be said for Millennials, who have witnessed the lowest savings interest rates in modern history.
To earn yearly interest of 2% or more in cash, savers need to lock away their money in no-access accounts for five years. On the other hand, Millennials can expect to earn twice or three times as much in interest risking your money by lending it via P2P websites.
3. Managing risk is simple
Cash deposits are pretty much 100% safe, but all forms of investing – including P2P lending – involve risking money. Sometimes, P2P loans go wrong, typically when borrowers fail to pay interest or capital repayments on time or at all.
To reduce exposure to late payments and bad debts, ‘diversify' your lending by spreading your money across a wide range of borrowers. For example, lending equal amounts to 100 different borrowers ensures that no more than 1% of the total is tied up with a single borrower.
If you’re a Millennial who doesn't wish to become a ‘DIY lender' (i.e. choosing individual loans for yourself) you can instead choose to invest in accounts that ‘auto-lend' money across a wide range of different borrowers. In some cases, these accounts come with ‘reserve funds' that can help to reduce losses and protect returns against bad loans.
For maximum diversification, you can lend across different P2P websites, accounts, borrowers, market sectors, time durations and interest rates. Doing this helps to make your lending less concentrated and your ongoing returns less volatile.
4. Existing loans can be bought or sold
When you think about P2P lending, you probably imagine that your money is transferred directly to the borrower.
That's how it usually works.
However, most P2P platforms also operate ‘secondary markets' or ‘aftermarkets' that allow lenders to buy or sell existing loan parts from or to other lenders.
In effect, you are taking over loan parts from other lenders by paying the previous lenders their loans back. Due to how P2P lending is structured, the original borrower now owes you.
The more active an aftermarket is, the easier it is for you to adjust or tinker with your loans. For more information, please read Where Can You Buy Or Sell Existing Loans?
In summary, P2P lending is generating a lot of interest among Millennials, who are attracted to its low costs of entry, speed and higher returns that it can generate from spare cash. Furthermore, the online nature of P2P lending means that curious Millennials can contact individual borrowers directly or engage with other fellow lenders, so as to learn more before risking your cash.
See how the P2P lending sites mentioned above compare to each other in 4thWay's comparison tables.
*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Growth Street, Landbay, Lending Works and RateSetter, and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.