5 reasons why young people are investing in peer-to-peer lending

Today’s generation of young people needs to think very differently about their financial futures. Job-hopping is becoming more popular while long-term job security falls lower on the list of priorities. We are seeing the continual rise of the gig economy (especially in the startup world), and it’s no longer the norm to be with a company for 20+ years. Thus, young people can no longer rely on their pension benefits being matched by their employers. Age spans are increasing, and the stability of social security is in flux. More and more young people are looking for ways to make and save more money, and many are flocking to non-traditional investment options like peer-to-peer lending.

why young people are investing in Peer-to-peer lending

Peer-to-peer lending, abbreviated as P2P lending (and often referred to as crowdfunding), is a system that matches people looking to borrow money—borrowers—to people looking to invest and earn more on their money—lenders or investors. Companies (like Bondora) offer their services to match borrowers with investors online, which allows for lower overhead and makes operations much cheaper than traditional financial institutions (such as banks). This allows for higher returns for investors and lower interest rates for borrowers. Of course, there’s always risk involved as borrowers can default on the loans (aka stop making payments). But there are many reasons why young people are choosing to invest in P2P lending, and we’ve outlined some of them below.

Young people prefer to cut out banks

As a generation that came of age during the financial crisis—and graduated from university when jobs were scarce and student debt was high—it’s no wonder millennials are massively distrusting of traditional financial institutions. Interest rates from traditional banks are painfully low, so the option to invest in a CD or in bonds isn’t that appealing to those looking to save. More and more consumer-finance startups are popping up as the financial and economic landscape continues to shift, and more and more young people are choosing to find alternative investment methods that don’t include—or wholly rely upon—traditional banking.

Young people prefer to cut out banks - Bondora

As stated above, P2P lending cuts out the bank. Borrowers looking for loans (who typically would go to a bank) can take out a loan through a P2P lending company. The P2P lending company then goes directly to investors to fund the loan. Because P2P lending services are all administered online, they have lower overheads (unlike banks) which allows them to offer higher returns. In turn, borrowers are offered much lower interest rates than they would have to pay at banks and are met with much less stringent criteria.

P2P lending is more tech-driven

Not only do millennials tend to distrust banks, but they find their services and financial systems to be inefficient and outdated—thus, not applicable to many modern-day situations. As a generation that has grown up in the digital age, young people are inherently more tech-driven than previous generations. That said, it’s obvious that they then are more favorably drawn toward tech-driven industries and services.

P2P lending is more tech-driven

The digital age also has allowed for more global connectedness and communication across borders has gotten a lot easier (and more efficient). The online component of P2P lending services allows for investing and borrowing across borders, which is a draw for many looking to expand their reach. A streamlined user-friendly interface is also very important to younger generations, as it’s becoming the norm (and is practically expected). Tech-driven services also tend to be optimized, easier, and more efficient for the needs of young people, which leads to our next point.

Young people favor simplicity and flexibility

P2P lending services, as mentioned, are primarily offered online—many of which provide numerous options for automation. To tech-savvy millennials, “online” simply means, well, a simpler ease-of-use. The borrowing and lending process is already simplified by cutting out the middle man (aka banks) and is made even simpler with automation options, user-friendly dashboards, and added tools.

Young people favor simplicity and flexibility

Young people are all about flexibility, from their employment situations to their financial decisions. Not only is P2P lending simple, but it’s flexible. Borrowers are offered more flexibility and lenders have fewer restrictions than those placed on traditional banks. Investors also find a great deal of flexibility in P2P lending regarding how much they can or want to invest, their entry and exit timing, account liquidity, and the borrower segments they wish to target or avoid. This flexibility, in turn, allows them to have greater control over their investments (if they so choose to do so).

It is easy to build a diverse portfolio with P2P lending

With greater flexibility comes the opportunity for greater diversification. Every financial planner or investment advisor will stress the importance of a diversified portfolio, and we all know the age-old adage that tells us not to put all our eggs in one basket. True and appropriate diversification, of course, can be a bit tricky across multiple types of investments and multiple asset classes when you’re just starting out.

build a diverse portfolio with P2P lending

While young people enter the world of investment and begin building diversified portfolios, it’s natural that they’re drawn to P2P lending. P2P lending allows for diversification within its service—instead of just investing in one loan, P2P investors are able to spread their money across a number of different loans. That way, if one defaults, they still have other loan investments to fall back on. P2P investors also are able to invest in different loans with different levels of assessed risk and return rates, loans to different countries, and loans with different durations. Different levels of risk, of course, leads to our last point.

Young people are less risk-averse and favor higher returns

Finally, it can be said that—typically—young people are inherently less risk-averse than previous generations. They are more willing to take on higher risk in order to receive higher returns. Unlike their predecessors (who were okay with investing long-term in things like real estate, gold, mutual funds, and equity in exchange for lower returns and lower risk), millennials don’t want to tie up their funds in something that offers—at best—mediocre returns. They want their time and investments to be optimized, and they favor higher risk for higher returns over stability. P2P lending platforms typically offer higher returns than traditional investment methods, but there’s always the rise that someone will default on the loan. The flexibility and diversification within the P2P lending structure responds to this by offering higher risk/higher return options to those so inclined.

less risk-averse and favor higher returns

Basically, younger generations don’t shy away from the unknown—they embrace innovation, change, and disruption. Although P2P lending has been around for some time, it is still considered a novelty within the financial industry. As much as they’re criticized, millennials tend to be forward-thinkers, trend-setters, and the industry shakers—so it’s natural to see them flocking to new investment options that are changing the world of finance. On top of (and perhaps because of) the reasons mentioned above, P2P lending is simply a perfect and easy option for young people to gain experience and dip their toe in the world of investing. As more and more fintech companies understand the shifting needs and demands found amongst the younger generations, we’ll see more and more alternative investment methods like P2P lending crop up.

What are your reasons for investing in in P2P lending? Let us know in the comments.

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