Micro loan investing is a new way of investing, and it is gaining traction very fast. With the development of peer-to-peer lending platforms, you can grow your money through micro loans. Micro loans are small loans given by individual investors through peer to peer platforms rather than financial institutions like banks and credit unions. Investors lend money to borrowers at a certain interest rate and for a certain period. Here is our beginner’s guide to micro loan investing.
Micro Loan Investing
- Micro loan investing involves lending small amounts of money to businesses and individuals through peer-to-peer lending platforms. There are many peer-to-peer lending platforms that link lenders to borrowers.
- When researching micro lending sites to invest in, look for those offering high-interest rates, safe and secure and those with many borrowers.
- You can start investing in micro lending platforms with as low as $5.
Contents
What is Micro Loan Investing?
Micro loan investing via peer-to-peer lending is a highly risky investment. In addition to the risk of platform failure, there is also the risk of borrower default. This means that there is always a chance that you could lose some or all of your investment.
Micro loans are small loans given out by individual investors to individuals and businesses through micro loan platforms rather than financial institutions. Micro loans are a good choice for people who cannot benefit from traditional loans issued by financial institutions. They were started to help businesses and entrepreneurs who could not qualify for a micro loan because of poor credit scores.
Assume that you want to borrow money to take your car to the garage. You have a number of options. You can go to the bank and take a small loan. Furthermore, you can also use your credit card or borrow from a family member or a friend. Alternatively, you can go online and use the multiple options that are available to apply for a loan, such as peer to peer lending companies. When you borrow from these companies, you are basically borrowing from another person through the company. For a borrower, you benefit by getting the funds faster, while investors benefit by the interest that you pay them.
How Microloan Investing Works
There are three parties when it comes to microloan investing. First, there is the borrower. This borrower can be an individual or a company that is in need of working capital. Second, there is the investor, who could be an individual or an investment company. Finally, there is the peer-to-peer company, which works as the intermediary. This company checks the creditworthiness of the borrower and determines whether they should be allowed to borrow. After this, the investor can select the borrowers to lend to. They can lend to them either fully or partially.
How to Invest in Microloans
To get started with micro loan investing, you need to have some extra cash or other investments. If you have backup cash, you can start lending money to borrowers through micro loan platforms. You can skip small purchases and save some cash that you can invest in micro loans. Microloans should be used for diversification. Therefore, we recommend that you have most of your funds in index funds, ETFs, and stocks.
Second, you should create your account with the company you decide to use. We recommend that if you can, you diversify by investing in two or more companies.
Finally, you should now deposit funds into your account and check the available investments. We recommend that you invest in a number of loans, which will help you diversify your income. Also, you can use the automated investing tools that are offered by these companies.
Top Micro Lending Platforms
If you want to start investing in micro loans, then you need to use some of the best micro loan platforms available in the market. Look for regulated platforms to ensure that your funds are safe and secure. Also, make sure that the micro lending platform has competitive rates. While there are many micro loan investing companies, it is recommended to use a few of the biggest ones. Here are the best peer-to-peer lending companies.
Upstart
Upstart is a peer-to-peer lending platform for consumer loans. It is an ideal micro loan platform for borrowers with limited credit history. Upstart considers many other factors other than credit score. Upstart advances micro loans for a period of between 3 and 5 years with a starting interest rate of 8.27%.
Prosper Marketplace
Prosper Marketplace is another excellent micro lending platform you can use to invest in micro loans. It is the second-largest peer-to-peer lending platform in the US. To get started, you just need to sign up. Prosper Marketplace offers investors annual returns of about 5.3%. You can invest as low as $25 to quality borrowers with an average annual income of more than $107k.
Lenmme
Lenme micro loan investing is a great way to earn competitive returns while making a positive impact on the world. As an investor, you can lend money to borrowers for a variety of purposes, including personal loans, business loans, and medical loans. Lenme offers a variety of lender protections, including the ability to see borrower’s credit scoring, borrowing history, and income. Additionally, Lenme has a low default rate of approximately 5%.
Lenme is also a very flexible platform for investors. There are no investment minimums or withdrawal fees, so you can fund as little or as much as you want. Additionally, you can choose the interest rate you are willing to offer on a loan, and borrowers can choose whether to accept the offer. This gives you a lot of control over your investment strategy.
Lenme now offers crypto-backed loans, which allow investors to generate higher returns with almost zero risk. These loans are backed by cryptocurrency, which means that investors are secured in case the borrower defaults.
Groundfloor
Groundfloor is a peer-to-peer lending platform that offers micro loan investments to accredited, non-accredited, and even international investors. With a low minimum investment of just $100, you can start investing in private real estate and earn fractional share returns as high as 10%. Every loan is backed by an underlying project or projects, such as a fix-and-flip renovation or a new construction project, to mitigate risk.
Groundfloor is a good option if you are looking for a way to invest in real estate without having to purchase an entire property. It is also a good option for investors who are looking for a diversified portfolio, as Groundfloor offers a variety of different loans to choose from.
Risks of Micro Loan Investing
There are a number of risks that come with investing in micro loans. Here are the most common of them.
- Liquidity risk: When you invest in stocks, you can easily sell the stock when you have an emergency. However, when you have invested in micro loans, you cannot easily exit the transaction. This is because the borrower will only pay back the funds as agreed.
- Interest rates risk: When you lend them money, you agree on the interest rates that the borrower will pay. Therefore, if interest rates rise, the borrower will pay the same amount. This means that you will miss out on higher interest rates.
- Company risk: The companies that offer these services are usually small, young, and less profitable. In fact, companies like Lending Club and Prosper make losses of more than $100 million. This means that these companies can easily go out of business.
- Borrower risk: When you lend the money, the funds are usually not insured. Therefore, if a customer dies or fails to pay, you have no way of recovering the funds.
Rewards of Micro Loan Investing
- Diversification: Investing in micro loans gives you a chance to diversify your investment portfolio and mitigate risks by spreading your money across different investments.
- Safe: Most investment apps have multiple security features like encryption to secure your money. They are also regulated by bodies like the Financial Industry Regulatory Authority (FINRA).
- Easy to use: Many micro lending platforms have an easy-to-use interface to make it simple for investors and borrowers to lend and borrow money easily.
- Low minimum deposits: With some investment platforms, you can start investing with as little as $25 and access various investment options like fractional shares and ETFs. This is not possible with many traditional brokerage firms.
Are Micro Loans a Smart Investment?
Microloans are a relatively new way to invest in the financial markets. They are small loans, starting as low as $5. Microloans can be a good way to diversify your portfolio and earn high returns, but they are also a risky investment.
If you have other investments and have backup cash for urgent needs, microloans can be a good way to further diversify your portfolio and potentially earn higher returns. However, it is important to only invest in microloans using cash that you don’t intend to use urgently, as the borrower will repay the money at the end of the agreed period, and you will only earn interest at the end of the period for which a borrower has borrowed money.
While the microloan industry is growing, it is important to note that microloans are still a relatively new investment product. Therefore, it is important to carefully consider the risks involved before investing. At the core of your investments, you should diversify across other assets, such as bonds, mutual funds, Bitcoin and index funds. These assets offer more stable and sustainable returns.
