Peer-to-Peer Lending Vs. Bonds

When it comes to choosing an investment option to grow your wealth, you will probably look for an investment with high returns and fewer risks. There are several investment options including bank and savings accounts, real estate, Exchange Traded Funds (ETFs), stocks, P2P lending and bonds. The popularity of P2P lending and bonds has been on the rise. For this reason, we will find out which is a better investment between P2P lending and bonds.

P2P Lending Vs Bonds: Quick Facts

  • When you invest in P2P loans, you give loans to individuals or SMEs while investing in bonds, you give money to governments or large corporations.
  • Investing in bonds requires a much higher initial investment than P2P loans.
  • P2P lending returns are usually higher than those you get from bonds.
  • Although bonds do not provide huge returns, they are fairly reliable because they are less risky.
  • With P2P lending, you receive regular monthly payouts while bonds have to mature before payout (sometimes up to 30 years).

What is P2P Lending

Peer-to-Peer (P2P) lending is the practice of lending money to businesses or individuals through online platform. The platform matches lenders with borrowers, mitigate risk, facilitate the transactions, and collect money on behalf of investors. P2P lending platforms usually operate with lower overhead compared to traditional financial institutions. This enables lenders to earn higher returns and borrowers can borrow money at lower interest rates. Examples of P2P lending platforms include Prosper, BlockFi, Lending Club, Mintos and Bondora Go&Grow.

What are Bonds

Bonds are simply loans from investors to governments or companies. To make money with bonds, you can either hold them until their maturity date and collect payments on them or you can decide to sell them at a higher price than what you paid initially. There are different types of bonds including treasury bonds, municipal bonds, and corporate bonds. To understand bonds further, read our beginner’s guide to investing in bonds.

P2P Lending Vs. Bonds: Factors to Consider When Deciding Between Investing in Bonds or P2P Lending

Before you decide on the investment option to pick, it is best to have the right information to help you minimize the risks of losing money and to maximize your investments. The following are some of the factors to consider when picking an investment option.

  • Age. You can choose a high-risk and a high-return investment if you are young. In this case, P2P lending will be a better investment choice. If you are older, it is best to choose a lower-risk investment that won’t put your retirement funds at risk. Your best choice will be bonds.
  • Amount. The goal is always to maximize your returns, so if you have a large amount of money, you can choose to invest in both investment options.
  • Goals. Goals are also important factors to consider when choosing an investment option. If your goal is to multiply quickly but run a high-risk of loss, P2P lending is a better choice.

P2P Lending Returns Vs. Bonds Returns

Both options offer favorable return rates to investors. However, the return rates you get from P2P lending are usually higher than those you get from bonds. Most P2P lending platforms offer return rates between 8% and 10%. The return rates you get on bonds depend on the types of bonds. Corporate bonds have higher returns compared to other bond types but even so, their return rates are between 3% and 5%.

P2P Lending Security Vs. Bonds Security

Is P2P lending safe? This is an important question you should strive to answer before investing in P2P loans. P2P loans are associated with some risks but there are ways to evaluate P2P risks and secure your investment. With P2P lending, there are mechanisms that can shift risks away from you (the investor) to the platform. These mechanisms include credibility checks, portfolio diversification, the buyback guarantee mechanism where the platform repays the full debt in case the borrower defaults and the bad-debt provision fund where the P2P lending platform uses money from the fund to pay bad debts in times of distress. Find out more about the risks of P2P investing in order to protect your investment.

Is investing in bonds safe? Although bonds do not provide huge returns, they are fairly reliable investment tools since they provide regular income. This, however, does not mean that they have no risks. Some bond risks include inflation risk, reinvestment risk, interest rate risk, default risk, and call risk. Some ways to reduce risks associated with bond investments include buying bonds when interest rates are stable, stick to short-and intermediate-term issues, and acquire bonds with different maturity dates to diversify your bond holdings.

P2P Lending Diversification Vs. Bonds Diversification

The volatility associated with the components of your investment can destroy your profitability therefore, mixing up your portfolio with different assets can help you generate consistent returns. With P2P lending, you can diversify your portfolio to prevent you from investing heavily in one sector. Generally, this protects your money from risks such as inflation, change in interest rates, and even natural disasters. The volatility of bonds is much lower and their returns can be fairly guaranteed.

P2P Lending Vs. Bonds: Who you Lend to

When you invest in P2P loans, your money is made available to individual borrowers, SMEs, investment property owners, and property developers. However, this will depend on your risk appetite and diversification strategy. When investing in bonds, you are lending your money to large companies or to governments.

P2P Lending Cash Flow Vs. Bonds Cash Flow

Bonds are usually held to maturity (10 years on average) before you can receive the interest pay-out. This means that you cannot access your money until the maturity of the bond is achieved. With P2P lending, there is a better cash flow since you receive regular monthly installments and you can also sell your loans and access your cash almost any time.

P2P Lending Time Commitment Vs. Bonds Time Commitment

If you buy bonds, you can sit back from the time of purchase to their maturity not worrying about how to manage your capital (stockbrokers or banks do the management). However, if you are investing in P2P loans and you want to diversify across different specialized platforms, you will need to spend considerable time in choosing the type of loan you want to invest in, you will need to carry out research and analysis, and you will also need to track your investment.

P2P Lending Investment Amounts and Tax Requirements Vs. Bonds Investment Amounts and Tax Requirements

Investing in bonds requires a much higher initial investment than P2P loans. The minimum starting investment with P2P lending can be as low as 20 USD and a minimum of 1000 USD is common with bonds. The interests you earn from both investments will attract taxes. With bonds, you may be liable for tax unless your bonds are eligible for pension.

Final Thoughts on P2P Lending Vs. Bonds: Are P2P Lending and Bonds Good Investments?

Both P2P lending and bonds are good investments but considering many aspects, P2P lending is the better investment. It is good to know that every investment method has its own risks and rewards. The type of investment you choose will depend on individual needs, investment Knowledge, and risk appetite.

Daisy Neema is a graduate of Chuka University. She is a prolific writer and researcher and has an interest in finance. She also loves writing about businesses and startups.