Have a few thousand pesos sitting around, doing nothing?
Looking for a better rate of return for your money?
You’re in luck—in this comprehensive guide, we’ll show you what P2P Lending is and how it can earn you a significantly better ROI compared to other investment vehicles.
What is P2P lending?
Peer-to-peer lending or P2P pools money from its members/investors and lends them to borrowers.
Unlike a traditional bank format wherein the bank is the exclusive source of funds for the borrower, P2P lends money chipped in from a group of investors.
There’s also the option to fund the whole loan by yourself, if you want (investor).
How does P2P Lending work?
In a nutshell, it’s essentially your typical “Paluwagan” with a few modifications. However, instead of simply taking turns in getting lump sums of accumulated cash from participants, you earn from it via interest gained by the money you lend.
P2P lending classifies participants into 2 groups: Lenders and borrowers.
Lenders: Investors. They fund the capital needed by the borrower. The money is then pooled or combined in order to accommodate varying amounts of capital to be borrowed.
Borrower: Borrows money from investors/lenders.
It’s similar to how a mutual fund works. P2P allows you to be an investor even if you don’t have a lot of money to invest with. But instead of pooling your money with others in order to buy stock, P2P combines it with money from other investors then lends it to borrowers.
P2P differentiates itself from Mutual Funds, however, by having the option of funding the whole loan by yourself (investor). You also get to pick investments on your own.
Furthermore, gains are not based on the performance of your investment in the stock market. You earn via interest paid by the borrower.
Why invest through a P2P Lending platform?
Better rates of return for your money
The average interest rate for a typical bank savings account is 0.25% per annum.
If you had Php100,000 invested, in a year your ROI (return on investment) is 250 pesos. Just enough to buy you an Amazing Aloha burger meal from Jollibee.
Hey, I like that burger, but as an investor looking to earn decent ROI, the bank is definitely not the place for me.
Compare that measly return with an average return rate of 10-15% from P2P (for FundKo, for example) platforms, you’re looking at a Php10,000 ROI in a year assuming a 10% return via interest.
That’s a hell lot of Amazing Aloha burgers! Clearly, all rates are not guaranteed but I know you get my point.
The option to diversify your investments reduces risk
With P2P platforms, you can spread out your investment across multiple loans.
What will this accomplish?
A diversified portfolio makes use of the law of averages—so even if one or more of your investments give a negative ROI, your other winning picks can “even out” your returns overall.
Potential passive income stream
With a regular savings or even MF account, you’re money is essentially tied (if you’re starting out).
Why? Because you have to let it sit there in order to accumulate any significant returns.
Especially if you don’t have that big of a capital to begin with. P2P lending platforms have the option to give you a monthly payout from your investments.
Sure, MFs can do that too but then again, P2P presents a faster opportunity to set a passive income source due to the higher ROI (per current P2P lending averages).
Low barrier entry investment option
How much do you need to start investing?
For as little as Php5,000, you can start funding loans from borrowers then start building up on your investment as your ROI grows (when you reinvest the earnings).
Compared to stocks, this feature makes it more enticing to first-time investors looking to test the waters.
Tends to be “faster” in reaching significant gains versus MF or banks
As mentioned earlier, the ROI advertised on these P2P platforms allows you to build up your earnings and assets faster (as of this writing, at least) compared to Mutual funds or regular savings account.
Even the current rates of the best personal savings accounts offered by banks right now seem to be no match in terms of yearly ROI from P2P (based on averages posted on P2P sites).
Pros and Cons of P2P Investments
|Potential for better returns||The possibility of borrowers defaulting is still present|
|Allows you to diversify your investments||Interest is taxable (if not done automatically by the P2P platform, it is the responsibility of the lender)|
|You get to pick which loans you want to fund||Your capital may not be invested at all times (see tips below for advice)|
|Ability to access your money at quickly|
|Requires little money to start with|
|Process if setting up an account is easy|
|Monthly gains can be a form of passive income|
Top P2P Lending platforms, companies, and websites in the Philippines:
This company is a subsidiary of GIDC and acts as a crowdlending platform connecting willing lenders and verified borrowers with each other. Using FundKo, you can start investing for as little as Php15,000.
This online P2P platform prides itself in being able to provide funding to borrowers within 24 hours.
It’s important to note, however, that this is primarily aimed at employers, if you’re looking from an investment standpoint. UpLoan essentially serves your means to offer salary loans to your current employees.
This company is owned and operated by Fintech Global Resources Inc. Their goal is to “create a secure and transparent marketplace for people in need of financial services, and people who are looking to invest.”
With Vidalia, you can start investing with as little as Php5,000. Per their site, they currently have 500 investors in their roster who fund loans from 16,000 registered borrowers. Their total invested assets sits currently at Php200million.
The company is based in Berlin, Germany and presents an option for Pinoy investors looking to move beyond the local P2P opportunities.
BitBond uses Blockchain technology to implement their payment and credit scoring. Their target market are small business loans.
Providing liquidity for your account receivables—that’s what Acudeen offers to members who sell “invoices” in their platform.
The unique thing about their platform is that it’s focused on helping SMEs maintain cash flow for running their business. As an investor, you can purchase invoices sold by SMEs which in turn can yield better rates than your typical bank savings account.
7. Lend PH
The site looks similar to job posting boards where you post your needs (if you’re a borrower) and then wait for a lender to fund your loan. The site does not look very stringent though in terms of verification of its borrowers and lenders.
The PH-section of this non-profit organization’s page shows loan requests from fellow Pinoys mostly needing funding for their businesses.
With as little as $25, you can help fund a fellow Filipino’s capital so they can operate their business (and climb out of poverty).
Note: The platform’s mission is to help change lives by making 0% interest rate loans available to its borrowers. So this is not necessarily an investment.
Tips to Succeed in P2P Lending Investing
1. Do your due diligence
As with any form of money-making investment, it all starts with knowing what you’ll be getting into. Keep in mind, this is not a get-rich scheme.
At the very least, read about how the whole system works (since you’re reading this, you’re off to a good start), compare lending sites, factor in all personal preferences (site’s user interface, ease-of-transaction, etc.,).
If you can, seek help from other experienced investors through groups or meets.
While not everything or everyone will be helpful, it may give you better insight on how to approach investing in P2Ps.
2. Start small
One of the main reasons why P2P looks appealing to investors is the low entry point requirement.
Imagine, even if you only have 5 or 10k in cash, you can start investing and have decent rates of return for your money.
The added benefit of being able to help others makes it even better.
3. Know thyself—how much risk can you tolerate?
“The greater the risk, the greater the reward” as the popular quote says.
But it really varies from one investor to another, so just because you’re friend thinks a particular loan will yield terrific results means you should follow suit.
Don’t listen blindly to advice, especially when there’s money involved.
As yourself, “what’s my risk tolerance?” “Am I more of a conservative type, risky, or something in between (moderate)?
Doing so will help you set the tone for your investing principle and keep you within your operating methods.
It helps avoid spur of the moment decisions which may lead to a loss.
4. Diversification is key
Betting all your funds on just one or a few loans may yield better returns—but it also heightens the risk of netting a loss.
The reason why mutual funds are popular (aside from the low entry point) is because your money is invested across several investment choices/vehicles with the goal of mitigating or lessening the risk.
Unless you’re a very risky-type of investor, diversification should definitely be considered as an investing philosophy.
5. Earn then reinvest
Any true successful business person will tell you that part of their success can be accounted to their ability to fight the desire to “cash in” immediately on their earnings.
Amazon founder and CEO Jeff Bezos, for example, is known for his stringent nature in spending their earnings.
This allowed him to reinvest the money back into growing Amazon into the global ecommerce behemoth that it is today.
From an investing standpoint, perhaps you can reinvest the money first until you reach a certain amount where the earnings can serve as a form of passive income source.
Otherwise, it will rob you of the potential to really rake in significant returns brought about by a larger asset pool.
6. Make sure you don’t have funds lying around (uninvested)
You should make it a habit to regularly check potential deals or loans that aligns with your investment philosophy.
This will help keep your capital “active” and not sitting around on your e-wallet doing nothing.
Money not being invested results to “opportunity lost” that could have otherwise been invested and resulted to a gain.