Introducion

Most peer-to-peer lending falls into the sweet zone, where potential returns are much higher than those offered by savings accounts, yet risks are lower than those provided by the stock market. This is supported by the fact that it has maintained a remarkably consistent performance since 2005.

But when compared to bonds, where does peer-to-peer lending fall on the spectrum? In comparison to bonds, peer-to-peer lending offers a significant number of benefits. The following is a list of the P2P lending advantages over bonds. 

How is P2P investment better than Bonds

Better Payoffs

The average annualized rate of return on a peer-to-peer lending platform is about 10%. While it's certainly feasible to get even greater returns with proper portfolio construction and a little of luck, records reveal outcomes that are slightly less astounding. Returns on P2P lending have typically ranged from 7% to 12% per year. Although this is a conservative estimate, it is still superior to the returns on most bonds. For example, Mintos offers on average 10-12% annually.

And that, of course, is bond-specific. Although high-yield bonds have the potential to provide higher returns, there is a reason they are often referred to as "junk" bonds: the associated risk isn't always commensurate with the supposedly higher rewards. Savings bonds and government bonds are two examples of the other extreme.

Investments in such (supposedly) failsafe options are unlikely to keep pace with inflation. Corporate bonds are most analogous to P2P loans, yet, they, too, lose the return rate competition, offering yields of just 3–5% on average.

Improved flow of cash

It is necessary to keep bonds until they mature in order to be eligible for the interest payments; if you sell a bond before it matures, you risk incurring a loss. Because bonds typically mature after ten years, this indicates that your money might remain dormant for an extremely extended period of time.

Not only will you not have to worry about keeping your money locked up for extended periods of time if you use peer-to-peer lending, but you'll also get consistent monthly payments that are immediately available for reinvestment. If you find yourself in urgent need of cash, selling your loans on some kind of secondary market is a common way to get your hands on your money early.

Few impediments

If you want to buy bonds directly (rather than via a bond fund), you'll need the help of a stockbroker or bank, but with P2P lending, all you need to do is register an account online, deposit some money, and get started investing.

Bond investing also often requires a significantly larger initial commitment than other types of investments.

Security

Not only can peer-to-peer loans provide higher projected returns than corporate bonds, but they also give investors additional tools to protect their capital. Bonds are often unsecured investments, which means you risk losing your cash if the issuing business declares bankruptcy.

Remember that secure government bonds truly bring you a net loss because of this, even if the likelihood of this happening is extremely low or nonexistent with these types of investments. When you invest in peer-to-peer lending, you can choose loans from various risk categories, ranging from loans to creditworthy enterprises to loans to higher-risk endeavors.

The most important thing, however, is that you be given access to mechanisms that may reduce the investor's exposure to risk or move it to the platform itself. Some platforms provide borrowers with the option of a buyback guarantee, which states that the platform would be responsible for the full loan's repayment if the borrower fails to make their payments.

Others manage what are known as bad-debt provision funds, which are basically emergency funds used to settle bad debts when times are tough.

The interpersonal aspects 

As a whole, as customers, we are constantly becoming more mindful. We are more inclined to purchase goods or services from businesses that respect the rights of their employees plus give back to the communities in which they operate. We are proud to assist local business owners and donate to charity causes in the community.

It's possible to look at peer-to-peer lending as a component of this jigsaw; rather than handing over our cash to big businesses with whom we have no ties, we may use it to assist people and small business owners who are having trouble making ends meet. It certainly seems to be a win-win situation if you can earn money while doing it as well.

Is peer-to-peer lending a better investment than bonds?

Some aspects of peer-to-peer lending clearly differentiate it from bonds, such as the fact that it is more straightforward to engage in actively or provides a more socially beneficial method.

P2P loans, on the other hand, tend to fall somewhere in the center of the spectrum; for example, they are riskier than bonds but provide returns that are on par with them, etc.

Conclusion

P2P may be an excellent alternative to bonds in certain situations. P2P loans provide much larger returns than bonds, but obviously come with a higher risk. Risk-mitigation strategies, such as loan diversification, may help reduce the potential for loss associated with investing in P2P loans.

Considering all of these factors, it is possible that exchanging at least some of your bond investment for peer-to-peer loans would be a logical decision for you to make.