P2P Lending: How Long Should You Invest?
The more risky an investment is, the longer you need to have in mind to invest. And you need to keep investing regularly throughout that period to really get your risks down to a sensible level for the rewards involved.
Most lenders like you and me who are lending through peer-to-peer lending websites focus on the lowest risk end. Here, we can earn a decent interest rate while still being highly protected from borrowers who can't repay over quite short periods of lending, by investment standards anyway.
4thWay® does professional risk modelling analysis on the P2P lending websites' data. And we assume a very big disaster will occur. Our tests are considerably more stringent than the ones the banks are required to do by the financial regulator.
According to our models, with the “safer” P2P lending websites, we still shouldn't expect to lose money over most five-year periods, even if a big disaster occurs during it.
We do assume there that you spread your money across several peer-to-peer lending websites and hundreds of loans, and that you re-lend the repayments and interest you receive regularly, you hold onto your loans to the end, and you don't keep lending when interest rates get pushed too far down. Otherwise, your risks are higher.
With such simple strategic precautions, I think peer-to-peer lending fits nicely in the middle as the 4thWay® to save and invest: with savings accounts being the lowest risk of making a sudden, permanent loss (albeit with pitiful interest rates), buying your own home roughly around the same risk as peer-to-peer lending (perhaps a bit higher due to the enormous debt burden many people take on), and then investing in the stock market being even higher risk.
