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Why income investors should consider peer-to-peer lending

17 - 02 - 2016 | Philip van Doorn | Market Watch

The emergence of peer-to-peer lending has created a new investment opportunity for income-seeking investors willing to do a little extra homework.

The financial media mostly covers short-term opportunities. That applies mostly to stocks, but you’ll also hear about bonds that are “up” or “down” as their prices fluctuate each day. With the Federal Reserve keeping short-term interest rates so low for so long, the great fear is that market prices for bonds might crash as interest rates rise.

Bond prices must decline as rates go up, since newly issued bonds will pay higher rates. This can be painful for investors holding shares in bond funds: The share price will fall as rates rise, and there’s no guarantee that you’ll make up those losses when, years from now, rates fall again.

That’s why long-term investors seeking income might be better off holding their own paper. If you hold a bond until it matures, you know exactly how much of a loss or gain to expect. If you paid more than face value for it, and interest rates declined since it was issued, you can calculate the yield to its maturity and decide whether the income will be sufficient to outweigh the capital loss.

What does all this have to do with peer-to-peer lending? The answer is that it looks like an interesting option for income-seeking investors.

During this long period of low interest rates, income-seekers have been faced with a continuing problem: As their bonds have matured, they have had to either accept lower yields or more risk, taking on dividend stocks, real-estate investment trusts or business development companies.

Peer-to-peer is an alternative income source that could work out well for investors who take the time needed to understand the risks and rewards.

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