5 Reasons Why Peer-to-Peer Lending Can Be a Great Cash Flow Investment

Retirement is becoming more and more difficult to achieve with 401(k) savings and Social Security alone. 

Therefore, many investors today are looking for ways to diversify their portfolio, protect against market volatility, hedge against rampant inflation, and generate cash flow with their investments. 

Why Are Cash Flow Investments Important?

You may have heard the phrase “cash is king.” I’m going to amend that slightly to “cash flow is king,” because positive monthly cash flow is what pays the bills consistently. You may have saved millions of dollars in the bank, but unless that money is invested in cash-flow-producing assets, it’s not doing you much good. Sure, it might get you through some tough times, but it certainly won’t last forever.

And if inflation continues to rise, that cash is actually losing value the longer it’s sitting in a savings account. Even some types of investments are having difficulty outpacing inflation, which is frustrating to investors with portfolios that are too heavily concentrated in securities like low-risk stocks and bonds.

This is one reason why cash flow investments are becoming more and more attractive to investors. Cash flow investments provide consistent peace of mind that money will be entering the bank account every month. Some popular cash flow investments include residential real estate, self storage facilities, equipment leasing, and more. Another cash flow investment option is peer-to-peer lending.

What Is Peer-to-Peer Lending?

Peer-to-peer lending allows borrowers to obtain financing directly from individuals rather than obtaining a loan from a bank or financial institution. As peer-to-peer lending has increased in popularity, there are now several online platforms that match borrowers with lenders. Some of these platforms include Kiva, Prosper, and Peerform. 

Peer-to-peer lending platforms differ in how they vet borrowers. Most platforms set the rates and terms that both investors and borrowers must adhere to. The interest rates available may vary based on parameters the borrowers meet, such as their credit score rating. 

Different platforms may specialize in specific niches. For example, Kiva caters to borrowers who are micro-entrepreneurs and small business owners, while a platform called Lending Club provides a space for medical providers to connect with prospective patients who require financing programs. 

Even though many platforms vet borrowers, investors should still be aware that peer-to-peer lending investments carry inherent risk, as does any kind of investment. Just as conventional banks loan money to borrowers who sometimes default, borrowers using peer-to-peer lending may also default on their loans. With that said, peer-to-peer lending can be a good investment opportunity for investors who have researched the asset class and know the risks. 

Why Peer-to-Peer Lending May Be a Good Cash Flow Investment

Peer-to-peer lending allows you to make money on your investments in the form of interest payments from borrowers. As borrowers pay back the principal you’ve loaned them, they’ll also be paying you extra money in interest payments every month. Here are five reasons why we believe peer-to-peer lending may be a good cash flow investment.

1. Strong Historical Returns

Peer-to-peer lending investments can generate returns of 10% or more. Earning 10% returns on your investments per year means that you have the potential to double your original investment in just over 7 years. What’s more, peer-to-peer lending has been known to generate these kinds of returns even in low-interest-rate environments.

So while not guaranteed, the potential of these high returns is enormously attractive to investors today who are grappling with the low-interest borrowing rates set by the Fed. Good diversification can help investors to spread their risk in a low-interest-rate environment. 

2. Hedge Against Market Volatility

When you invest in the stock market, it’s pretty much guaranteed that you’ll experience market volatility. And while returns average out positively in the long-run, market volatility can be devastating for investors who are already retired and are relying on their securities investments to pay the monthly bills. Therefore, it’s always a good idea to diversify and hedge against market volatility.

Peer-to-peer lending is less susceptible to market volatility due to the fact that investors are lending money directly to borrowers who continue to be able to make payments, even when the economy is experiencing unpredictable stresses. And if your borrower does default on their loan, the peer-to-peer lending platform may have a collections process in place to increase the likelihood that you eventually get your money back. 

3. Diversify Your Streams of Income

Building passive income streams is the only way to become financially independent. Some people rely on Social Security, which no longer provides enough monthly income to cover many people’s cost of living expenses, while others rely on dividends or consistent withdrawals from their nest egg. But as stated above, those types of investments can be extremely susceptible to market volatility.

Peer-to-peer lending allows individuals one way to diversify their passive income sources in the form of interest payments. Research shows that millionaires have, on average, seven streams of income. The more streams of income you have, the better protected you are when one or two streams of income are performing poorly. 

4. Control Your Investments

Peer-to-peer lending also offers investors a significant amount of control over their investments, which is not common for traditional securities like stocks, bonds, and mutual funds. As a peer-to-peer lender, you have the power to review and vet the borrowers you choose to lend to. You can view their credit scores, their work history, their repayment history, and more to determine the level of risk you are willing to take in each of your investments.

5. Low Entry Requirements

Finally, the cost of entry to invest in peer-to-peer lending is extraordinarily low compared to other types of cash flow investments, such as real estate and venture capital. In fact, peer-to-peer lenders can get started on some platforms for as low as $25 or $100. (Of course, investing more money means you have a greater potential to see much higher returns.)

This low entry requirement presents huge opportunities. You can more easily spread risk with low entry requirements, meaning that you can invest in many peer-to-peer loans of varying levels of risk. Additionally, low entry requirements free you to invest your capital in other alternative asset classes, further diversifying your holdings.

How Chicago Trust Administration Services Can Help

At Chicago Trust Administration Services, we help savvy investors enjoy the tax advantages of investing their retirement savings in alternative assets with a self-directed IRA. As self-directed IRA administrators, we help investors stay compliant with IRS regulations while using their retirement savings to diversify their investments, increase their return potential, and invest for cash flow. 

To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.

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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.