Peer-to-Peer Lending – A Good Investment if you Have Sharp Math Skills
Peer-to-peer lending, otherwise known as P2P lending, is a platform for matching lenders with borrowers online. Because the companies that run these services tend to provide a cheaper service than banks, for instance, lenders can earn higher returns and borrowers can get lower rates. Some investors have found this to be a lucrative service to get involved in, as there can be up to 6 percent return on investment (ROI). Getting into P2P lending is an option for those who want their money to work for them, but it is imperative that you be highly proficient in math to calculate risk effectively.
Why it is Important to have Sharp Math Skills When Investing
How to Improve Your Math Skills
It should go without saying that investors who want to succeed need to be good at math. You need to be able to work out ROI, assess risk, and make smart decisions. Some quick choices have to be made as well, and according to Mergers & Inquisitions, mental math is the most important attribute for investment bankers.
There are enjoyable ways to improve mental math skills, which don’t involve having to study text books for hours on end. Some investors opt to play card games like blackjack in their free time. The Betway blackjack guide notes how players need to calculate their probability of winning. This helps them choose when to hit or stand. Fantasy card games also involve a lot of mathematical skill. In CD Projekt Red’s card game, Gwent, players need to work out the provision costs of the cards in their deck in relation to their value within the game. By carefully costing cards correctly, players can put themselves at an advantage. Even family games like Monopoly require players to use mathematical skill. Statistically, the orange properties are landed on the most so players should look to buy these first. Partaking in any of these games can help refine mental mathematical ability.
What is Peer-to-Peer Lending?
Peer-to-Peer Lending (AKA P2P Loans or Crowdlending) Explained in One Minute
If you’re someone with strong math skills, you may be interested in investing money and working out ways to make your assets work for you. If it’s online and something that can be done from home, that’s even better. This is where P2P lending could be an area of interest. The beauty of this type of investment is the fact that it can be done with limited capital.
P2P is a trend that has grown in the internet era, and the first companies came about in the mid-2000s. Zopa was the first P2P company in the UK in 2005. By 2017, the company also became the UK’s first peer-to-peer company to lend more than £2 billion worth of loans. After it navigated the financial crisis of 2007-08 without losing any of its investors’ money, Zopa inspired a number of other P2P businesses to come about. Funding Circle, which started in 2010, became one of the most significant P2P platforms for business funding and allowed investors to offer money directly to small companies. Businesses like this make a profit by charging investors and borrowers a small fee to use the platform. These fees tend to be lower than through traditional institutions, which helps make them so appealing to users.
Investors who are interested in getting into P2P lending need to understand that there are some risks involved, as there’s no middle man like a bank to provide security. There is the potential for higher earnings, however. Calculation skills come into play because of the fact that the loans involved are self-amortizing. This means that the value of the investment will change over time and diminish as each return payment is made. This is different to bonds, for instance, where there is a fixed amount of interest. With P2P, most of the interest is received up front with the principals being paid towards the end of the loan. Therefore, investors need to continuously reinvest the payments into new notes in order to make steady returns.
Math skills are essential for people who want to get into P2P lending because there is a lot of calculation of risk vs reward involved. Due to the depreciating nature of the investments, careful planning is required, and interest received should be immediately reinvested in order to generate a steady income. If done correctly, there is a good ROI to be made from this platform.
Thanks for this great article, I’m wildly interested in P2P lending and I’ve been investing with Funding Cirle since a year now. Enjoying their services and the projects that they offer.
I don’t necessarily agree that you need sharp math skills for this kind of investment. They investments are rated by the companies, so that could be your departure point. After that, it’s important to see how long they exist and if they have made profits over the last years. If we look at Funding Cirle, you will get a fixed amount of payout per month. As you mention, towards the end you will get less interest and more principal payment. Still you will get a fixed price per month, so if you distribute your return evenly over the months there should be no issue with that.
If you’re looking at P2P lending where you lend to individuals, it’s important to look at the buy-back guarantee and the risk that you’re taking in terms of credit rating of the companies. You can make it more complicated, but I don’t see the added value of that.
As long as you diversify your portfolio and P2P lending is a small percentage of it, you will be fine. If you like risk, take it. If you don’t, don’t take it.
Thanks for writing this article and switching on my brain.
Math skills are so important when jumping into crowdlending. A lot of the platforms have different methods of calculating ROI, which makes it difficult to compare.
Therefore I always advice people to do this calculation for themselves. It takes some time and energy, but makes it so much easier to see the real performances.