Investing for retail investors - loans vs bonds

There are many investment opportunities out there, with loans and bonds being two ways. Investments always come with a risk, but which one of these is better?

In this article, we’ll be explaining the difference between the two, the pros and cons for each and then a summary of which one is more appealing. Regardless of whether you’ve invested before, having a diverse portfolio of investments is certainly beneficial.

Investing in loans

The best way of investing in loans is through a popular investment called peer to peer lending. It’s where the retail investors invest in real estate projects, businesses or consumer loans. There’s full transparency on where your money is going, and you end up receiving regular payment, depending on the rate of return offered for the product. 

P2P lending platforms offer the potential of large returns for investors, and for a first-time investor, they can be a really lucrative opportunity that’s worth taking advantage of. There’s a number of platforms that retail investors can invest in, so it’s worth shopping around to see which is the best one for you.

Start your search by reading reviews about P2P lending sites on P2P Empire. This website tests and reviews P2P lending sites in and out and gives you a good idea in which P2P platforms you should invest.  

Pros and cons of P2P lending

As with any investments, there are pros and cons to each. 

With loans, the advantages are that they have high diversification, and they usually come with good protection. 

The platforms tend to be more reliable and the minimum investment can be only a few pounds.  

That means that anyone can invest and it’s not just for those who run businesses or have extensive knowledge of the financial industry. 

There’s also very good liquidity in the opportunity, and no fees are usually the case. 

The cons of loans, though, is that it can be hard to choose the right platform for loans, especially as there’s quite a lot of them to choose from. You also want to pick one that isn’t going to risk collapsing, and some products are often hard to estimate the risk on.

Investing In bonds

There are two ways to make money as an investment in bonds. The first is to buy a bond and hold your money in it until the maturity date. Or you can buy a bond and hope to sell it for more than what you got it for. There are also a variety of types available for you to choose from such as government bonds, corporate and treasury as examples. 

Bonds are bought over the counter, rather than it being like a stock where it’s in the public domain. The issuer is promising to provide the lender with regular payments in return for holding the bond for a certain period of time. That period of time can vary and the longer the period, the more regular payments you’ll get.

Pros and cons of bonds

Bonds have their fair share of pros and cons too. 

They are a safer way to invest and to diversify your profile at the same time. They can offer a predictable stream of income, and because you can pick the type of bond you want, there are ones that can help your community such as those that help improve school systems and education or developing public buildings.  

The disadvantages of bonds are that your money is locked away for a period of time and that money might be untouchable for years. With investments like stocks where you can freely by and sell, this one is more restricted. You also opt-in an interest-rate risk that offers a certain rate, so even if the issuer then offers a higher one, you’re stuck with the lower. That means your bond’s value drops, and you could end up losing more money because of it.

Which Is better for you?

Investing in loans and bonds have their similarities, but there are certainly a few differences that are worth acknowledging. 

With bonds, you can’t necessarily see where it’s going whereas with P2P lending, you do get that awareness of what you’re investing into specifically. 

Bonds can offer that safer investment, while loans can have their own drawbacks. 

For example, if the borrower defaults and can’t pay the money back, then you as a lender might lose money. You then have to hope that the platform you’re using offers a buyback guarantee, otherwise, your investment would have been all for nothing. 

Whatever investment you go for, always remember the risks that come with both and that you should only be investing money that you can afford to lose.

You can learn more about bond investing in this guide from Investment Canvas.