We believe that any well-diversified investment portfolio should hold a good mix of equity investments, traditional bonds investments, as well as alternatives. P2P lending falls into the alternatives category to help balance the needs between low-yield bond investments and higher-yield equity investments that have much higher volatility. In a way, peer to peer lending can act as a hybrid investment to deliver yields close to or better than equity investments, while offering the low-volatility and uncorrelated results.
In terms of mechanics, p2p is not yet as popular as traditional equity investments, and as such, there is not yet a liquid market to sell your investments. While several marketplaces have established their own secondary markets, liquidity is not as high with p2p as with equity investments. P2P requires a longer-term investment horizon as liquidity is not guaranteed to be available. Additionally, with p2p, you choose the individual loans which you would like to invest in. Therefore, since every loan is unique, performance may vary from one account to another - especially with different strategies. Since each loan is funded individually, there is a concept known as Idle or Uninvested Cash which can typically take anywhere from a few days to a few months to fully invest in a diversified p2p portfolio. Also different from equity investments, p2p portfolios produce monthly principal and interest payments on a fully-amortized schedule providing regular cash flows. For folks in retirement or nearing retirement, p2p can be an attractive alternative to dividend paying stocks, annuities, or bonds.