Conservative investors usually have few options when it comes to investing their hard-earned money. They stick to low-risk options like savings accounts, municipal bonds, and index funds.The more audacious investors, who believe in the high-risk high-reward theory, invest in the stock market to grow their capital (Apple, some new drug company, even penny stocks). Private loans offer an investment option that combines safety and return.
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Risk adjusted private loans are one of the simplest yet safest avenues available to obtain higher investment returns.
The Re-Emergence of Private Lending
Private or direct lending has recently become a popular option for both investors and for borrowers seeking funding. Private lending has been present since the introduction of currency and trading, but re-emerged in the wake of the financial crisis in 2008.
The financial crisis derailed the U.S. and Global economy and left banks in a precarious situation. In many cases they were unable or unwilling to lend money to borrowers in need. This situation gave birth to the phenomenon of private lending.
How Private Loans Work
Private lending involves three parties – the borrower, the lender, and the direct lending company that connects borrower and lender. Just like a traditional loan, the borrower applies for a loan through the direct lending company.
The company determines the desirability and pricing of the loan using various metrics, such as collateral value. The loan is then syndicated to a group of lenders that provide the capital and earn the loan yield (interest rate) of the loan.
You can think of the investors who provide the loan capital as their own bank in a way. These structures are a win-win for everything involved. Borrowers receive a loan they could not easily or otherwise get. The lenders receive a return on their investment in the form of interest payments. Interest rates are usually 9-11% which is superior to what they could earn elsewhere.
How Private Loans Stack Up Against Other Investment Options
The stock market is too volatile for most risk-averse investors. Government bonds, on the other hand, offer such a low rate of interest that many people do not even consider them a feasible investment option.
As a result, a large number of people simply leave their money in their savings or checking accounts, despite earning little or no return. These high cash balances could be put to better use by investing the money in other avenues, which are less risky than stock markets but offer a higher rate of return than deposits and savings accounts. This is where marketplace private loans enter the equation.
The Advantages of Investing in Private Loans
Marketplace loans generally offer investors a higher rate of return than certificates of deposit or a savings accounts. Even in its safest form, private lending transactions offer better returns to those that can typically be derived from a one-year bank CD.
The growth of private lending as an investment opportunity reflects the increased ease of access it offers to investors. Historically, investment opportunities such as private lending were available to the few with preferred access. Now, with technology and increased connectivity, these opportunities are available to a broader audience of investors.
Taking the First Step
Risk adjusted private loans are one of the simplest yet safest avenues available to obtain higher investment returns. Private lending comes in many forms and increasingly is offered through more and more companies.
Do your homework, and choose wisely. Focus on companies with a history of good performance. It is time to make money off of your money!