COVID-19 changed many things in addition to the health and wellness of thousands of people. With the economy stumbling and millions of people losing their jobs, it’s important to think about whether it’s a good time to invest in peer-to-peer loans.
What’s the Risk?
There’s always a risk when investing in peer-to-peer loans outside of a pandemic. The risk of default increases tremendously in the face of COVID-19, though. How are P2P lenders responding? It depends on the platform, but many are doing the following:
- Restricting new loans for the time being – Until things settle down, some P2P lenders have shut down applications for new loans. Not all platforms have done this, but those that remain open to new applicants may have stricter requirements.
- Closing the secondary market – Most P2P lenders feared that a majority of investors would ‘dump’ their P2P loans in the face of the pandemic. The fear of default is huge as millions of Americans lose their jobs. This could flood the secondary market and cause chaos within the market. Many P2P lenders stopped that for now.
Should you Invest in Peer-to-Peer Loans
The risk of default will always exist. That’s why choosing a platform that has the most stringent guidelines and transparent policies is important. If you know a platform carefully screens applicants, inquiring about their employment now and in the future – knowing that anything could change in the blink of an eye, you may feel better about the process.
If you are unsure about the platform’s ability to track a person’s ability to afford the loan, though, you may want to look elsewhere or at the very least, greatly diversify your investments by investing the minimum amount required in each loan and investing in multiple loans.
For example at LendingClub, you can invest $25 in each loan. If they have 80 loans to invest in and you have $2,000, you can invest in all 80 loans. This diversifies your risk. If 10% of the loans default, you still have the other 90% to rely on for your earnings.
Peer-to-Peer Loans Compared to Other Investments
How do peer-to-peer loans compare to other investments, such as stocks and bonds during COVID-19? Like any investment, there’s no way to predict what may happen.
During a bear market, it may be fruitful to buy stocks you otherwise couldn’t afford and wait for the market to change to earn your profits. Like anything else, though, there’s no guarantee it will increase. Bonds, on the other hand, are among the safest investments, but they also yield the lowest returns.
Think about your risk tolerance, expecting the worst during COVID-19. If you can withstand the risk and diversify as much as possible to protect yourself against it, investing in peer-to-peer loans may be a great way to make money during this time when many people are losing money, especially in the stock market.