Why P2P is ideal for leveraging the compound interest effect

P2P lending is an effective way to take advantage of compound interest. It is significantly better than investing in a savings account, REITs, ETFs or stocks. It even outperforms cryptocurrencies. In today’s article, you will learn why compound interest is so attractive in P2P lending.

What makes P2P lending so lucrative?

Personal loans and the platforms on which they are offered have undergone extremely strong growth in recent years. For this reason, more and more investors are becoming interested in this type of lending. This is also leading to an increase in the amount of loans granted and the returns paid out.

Even in the midst of the coronavirus crisis, which hit the entire financial sector hard in 2020, many P2P lending providers fared significantly better than their competitors. This shows that personal loans are increasingly becoming a long-term investment opportunity with high returns.

The attractive features of P2P lending also allow investors to effectively leverage compound interest – an effect that only becomes clearly noticeable with longer-term investments.

This is because the compound interest effect ensures that interest already earned generates interest itself in the future. As a result, the capital grows faster and faster.

Today, we take a closer look at the reasons why P2P lending is an ideal investment for taking advantage of the compound interest effect. To do this, we answer three key questions:

1. Why is lending so advantageous for investors?
2. What returns can investors expect from P2P lending?
3. What added value does P2P lending offer, and what conclusions can be drawn from this?

1. P2P lending: The advantages for investors

Attractive returns are by no means the only thing that makes P2P lending an interesting investment for investors. Investors also benefit from the fact that P2P lending is based on a centuries-old financial concept and not on methods for which there is still little experience – think cryptocurrencies.

The financial concept behind P2P lending is simple: people put their money in the bank and receive interest in return. Banks lend this money to people who need it and charge a fee for doing so.

P2P lending also uses this concept, but offers the advantage of lower fees and faster transaction speeds made possible by the Internet.

Investments in personal loans do not incur any of the usual costs that investors have to bear with stocks, cryptocurrencies and the like. Compared to the €5, €15 or even €50 that various brokers and financial institutions often charge per transaction, P2P investments are virtually free of charge.

2. Attractive returns through P2P lending

High returns mean high compound interest – and that certainly makes investors’ hearts beat faster.

Comparatively high returns can be generated through P2P lending. Although the interest rate naturally depends on the respective portfolio or the selected loans, investors can expect an average return of 11 to 12% per year. That is quite generous.

Some people may now be asking themselves: ‘As an investor, wouldn’t I be better off investing my money in stocks? They may yield even higher returns in the long term.’ Well, as we should know by now, at least since the coronavirus crisis, markets react very quickly to crises. This also applies to stocks. However, these recurring crashes are part of our economic system.

If, as in the case of the coronavirus crisis, the economy collapses, this means that the responsible central banks drastically reduce the key interest rate – in some cases even to zero – in order to stimulate the economy again.

In the subsequent growth phase, this value then rises again until, a few years later, the next crisis and crash hit. It is precisely these ups and downs that make stocks attractive at different times.

When interest rates are high, financial products such as bonds are usually a much better option than securities.

High interest rates on the stock market can quickly be wiped out by crises. But this is exactly where P2P lending comes in. This is because price fluctuations are much less pronounced than with stocks, for example.

Let’s take a look at the chart below, which shows the performance of the S&P 500 over the past few years, including the crisis year of 2008.

The ability to generate consistent returns even in times of crisis makes P2P lending an attractive investment for compound interest. This is because compound interest requires long-term, consistent performance.

3. The added value of P2P lending for investors

P2P lending is an interesting way for investors to make the most of compound interest. But not everyone knows why P2P lending offers such added value at the end of the day. Therefore, here is a brief overview.

P2P lending is characterised by attractive returns. Investors achieve average returns of 11 to 12% per annum.

At the same time, P2P lending has already proven in the past that it is a stable form of investment even in times of crisis. This crisis resilience is proving itself once again in the current pandemic and is another driver of the compound interest effect.

Finally, compared to other forms of investment such as stocks, P2P lending has the major advantage of low entry costs. While investors must first overcome this initial hurdle in order to generate additional income, it is completely eliminated with P2P lending. This alone makes a significant difference in the total income earned by investors.

Conclusion: Take advantage of the potential of P2P lending

P2P lending offers a whole host of advantages. And investors can reap the benefits of these advantages – from attractive returns to stability in times of crisis. What’s more, the entire P2P industry is relatively young. So take advantage of this potential and get involved in investing right from the start. I’m sure it will be worth it.