Today, there are so many different opportunities for investment it can be a challenge to identify the best fit for your capital. While equities are often thought to yield high returns with fairly low risk, it takes time for them to fully develop and come to fruition. Alternative investment vehicles are coming into the market that are becoming particularly attractive when investing with a low appetite for risk.
The genesis of marketplace lending
Advancements in technology, coupled with the recent financial crisis, created opportunities for innovative lending options to flourish. Enter marketplace lending, which matches investors with borrowers through the use of online platforms. The investments run the gamut and include real estate deals, secured business loans, student loans and more.
Marketplace lending platforms can have advantages over traditional financial institutions, often operating with lower overhead and resulting in higher returns for investors and generally lower interest rates for borrowers. Due to these advancements, the loan process is faster and provides liquidity to a somewhat illiquid market.
How marketplace lending compares to stock investments
Prior to funding an asset or loan opportunity, investors typically will evaluate and consider cost, liquidity and risk. Stock market volatility and wavering interest rates are nothing new. The general goal of investing in stock is to acquire a portfolio and build wealth gradually. The stock market is intrinsically designed to grow with time. Typically, this is why stocks are viewed as long-term investments and shareholders hold on to them despite short-term fluctuations in the market.
With consistency and diligence, the stock market can make for a profitable long-term strategy. According to Credit Suisse, as of February 2017, the U.S. averaged 6.4 percent in inflation-adjusted equity return. And while you can’t eliminate risk entirely, you can assuage it by diversifying your asset classes. By this method, if an area of the market is performing poorly, other areas ideally can serve as a means of balance.
Marketplace lending, on the other hand, has consistent returns with lower volatility. Many marketplace lenders allow their loans to be pooled or individually funded, meaning you can diversify by interspersing funds through several smaller loans or lend a greater amount towards a single larger loan. Investopedia names marketplace lending as one of the best investments for high return rates.
This is in part due to the fact that many marketplace lending platforms have transparency in the risk for their lenders. Typically, loan requests are evaluated and assigned an accurate interest rate, as well as a risk rating based on the borrower’s and loan’s characteristics. Essentially, the main risk associated with marketplace lending is that you are loaning to people who may not have been able to get approved through traditional outlets. However, it is up to your discretion on which ratings you will fund. Given the tightened credit environment, marketplace lenders are able to provide financing to those borrowers who may have been jettisoned by their previous lending relationships.
Where to put your funds
Every investor’s situation is different. Both marketplace lending and stock investments have their pros and cons. For some, one may be a better investment than the other. For others still, it may be best to incorporate both. Regardless of where you choose to invest, go in with a plan and customize it to the amount of time you have to reach your unique goals. It is smart to go into the transaction understanding your appetite for risk and overall timeline.
Gary Bechtel serves as president of Money360. Prior to joining the company, he was chief lending/originations officer with CU Business Partners, LLC, one of the nation’s largest credit union service organizations (CUSO).