Can P2P Lending Help Generate Passive Income? A Quick Guide – Forbes Advisor INDIA

Can P2P Lending Help Generate Passive Income? A Quick Guide – Forbes Advisor INDIA
Written by Publishing Team

Many people around the world are earning income by making some smart investment choices and putting in place a system that helps them to utilize their skills without much effort or time. Passive income refers to the profits of this system refers to the cash flow income of an entity and is derived from various sources without having to put in a great deal of time, energy, effort or any other resources.

Some examples of passive income include wallet income, rental income, equity income, and viewing ads, while some New Ages include e-books, YouTube channels, and P2P lending, among others.

What is P2P Lending?

P2P lending directly connects people with idle money who are interested in lending to people in need of credit, thus removing broker margins. This enables lenders to earn higher returns on their investments and allows borrowers to get quick loans at lower cost.

How can I make money with P2P lending?

Lenders receive the money they lend in the form of equal monthly loans – equal monthly investments – which include both principal and earned interest income. The borrower repays the lenders every month in equal monthly instalments. The P2P lending platform collects EMI loans on behalf of the lender from the borrower and credits them to the lenders’ escrow account where the lender can choose to withdraw or invest again.

Most lenders are able to earn high and stable returns by building a diversified portfolio. However, building a portfolio that mitigates the risk of default by spreading the investment across multiple borrowers of various risk profiles, demographics, profession, etc. can be time consuming. P2P lending platforms incorporate innovative products and processes to reduce the time and effort required to build a portfolio.

How can my earnings from P2P lending become passive income?

By definition, passive income should be earned without spending a lot of time and energy. P2P lending earnings can become passive income through smart investment decisions and choices.

1. Reinvestment

The lenders earn their income from the loans they invest in through EMIs that are added to their escrow account on the platform every month. They have the option to withdraw these equal monthly installments or reinvest them back into the loans listed on the platform.

By reinvesting, the lender chooses the following:

  • Take advantage of compound returns: Data shows that lenders who reinvest earn up to 10% more returns than those who don’t.
  • Significantly reduce time and effort: By activating reinvestment, lenders ensure that their monthly earnings are automatically reinvested in the same products or plans they have chosen and continue to generate returns for them. After that, they do not have to spend more time investing this money.

2. Automated investment

P2P lending platforms provide automated investment options that reduce the time and effort required to build a portfolio. Instead of spending time studying and choosing each borrower profile, you can choose to add funds for automatic investment and select different criteria that align with your investment strategy. The algorithm automatically builds your portfolio by matching your investment goals with the borrower profiles included in the platform.

Auto investing is a more efficient and less time consuming investment process that works for you to help you earn passive income.

3. Systematic plans to generate income

The newer, more efficient and less time consuming way to invest in P2P lending is when many investors pool their money in one portfolio to achieve efficiency in building and managing the portfolio.

The pool uses data science and artificial intelligence (AI) to build and manage a portfolio that has the potential to generate high and stable returns.

Once you add your investment amount and allow the platform to cash it in, your job is done. The platform’s algorithm will disburse the pooled funds into a diversified mix of loans and loan products according to which it has the ability to repay to provide high total returns.

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