p2p lending to teach your kids about finance

Last month, we talked about the pros and cons of giving your children a monthly, weekly, or daily allowance. We also gave some tips on how to best structure an allowance system so it can help teach your children about finance. One of those tips was to incorporate a peer-to-peer lending (P2P lending) system within your household, and we thought the idea was one well worth exploring.

What is P2P lending and how does it work?

First, let’s quickly go over the basics and nuances of P2P lending. Peer-to-peer lending, abbreviated as P2P lending and often referred to as crowdfunding, is a system that matches people looking to borrow money—borrowers—to people looking to invest and earn more on their money—lenders or investors. Companies like Bondora offer their services to match borrowers with investors online, which allows for lower overhead and makes operations much cheaper than traditional financial institutions (such as banks). This allows for higher returns for investors and lower interest rates for borrowers. Of course, there’s always risk involved as borrowers can default on the loans (aka stop making payments).

So in a nutshell, what are the benefits of P2P lending?

Basically, we can boil it down to borrowers having quick access to the loans that they need while investors can generate profit or more income from the interest paid by said borrowers.

How can I use a P2P lending system with my family?

We know what you’re thinking. Borrow money—sure, interest—great, P2P lending—I got it… But what does this have to do with my family? Well, think of it this way—your children are perpetual borrowers. Financial drains, needy beggars, money-grubbing little spenders (but darn, if you don’t love ‘em anyway). All kidding aside, they are a giant component to a family’s financial system, and it’s important they learn to become financially literate to become contributing members of society. Obviously, it’s extremely important that you teach your children how to save first and foremost (and not to belittle spendthrifts). After all, money doesn’t grow on trees. But why not also teach them about finances, investing, interest, and borrowing by using a P2P lending system as a model? You can have some fun by allowing them to loan money to one another (or even borrow from you) and, in some form or another, earn interest.

euro tree - bondora

So how do I go about creating a household P2P lending system?

This is where you can get creative, as you can be as simple or as intricate as you’d like. This may be determined by the age of your children—you can implement a simple system with younger children and get more complex if your children are older. Figure out the system you want to use (either alone or with your children, if they are old enough to grasp the core idea behind it) and then make a written plan to be used as a template for the family to follow.

p2p lending - interest

Perhaps you can create different options for interest when first outlining the system, or they can be decided on an ad hoc basis. Remember—the interest doesn’t have to be physical money. It can be in the form of the borrower doing chores or favors for the lender at certain intervals until the loan is repaid. For example, with younger children, the borrower may clean the lender’s room once per week ((in addition to paying back the loan with physical money) until the loan is repaid. If an older child borrows from a parent, they may do the laundry or wash the dog once per week (in addition to paying back the loan with physical money) until the loan is repaid. Use your judgment—you know how much instruction or creative freedom is necessary when creating a P2P lending system for your household.

pet washing

What are the different steps to a household P2P lending system?

These steps include simple examples (for younger children) and more complex examples (for older children).

  1. Simple: Your child needs money for something, so they make a request at a family meeting or by writing it down on a board. They will say what they need the money for and how much they need. Basically, they—the borrower—will “apply” for a loan.
    More complex: Your child needs money for something, so (following a template or on their own) they make a proposal/plan to present to the family. They will outline their own financial circumstances, what they will do with the money (aka what they’ll buy), and how much they will need. They can propose a loan repayment plan, but that also can be created together as a family.
  2. Simple: As a family, you can decide if this is a worthy investment. If deemed so, someone with the available amount of money (be it a sibling or parent) can decide to lend the money/invest in the loan—hence, become the lender/investor.
    More complex: As a family, you can do a “risk analysis” and weigh out the pros and cons as to whether or not it’s a worthwhile investment. For example, has the potential borrower taken too long to pay back any previous loans? What is their financial history? If you want to get more complex, you can even develop a credit scoring system to teach your kids about credit scoring (but we digress).
  3. Simple: Decide on the repayment system and how interest will be paid. See our previous examples for non-fiscal interest ideas.
    More complex: Depending on the risk analysis of the previous step, you can decide the level of interest that should be paid (with physical money or in other ways). If the borrower has a shaky history, you can implement a higher (or more demanding) level of interest to be paid to the lender.
  4. Simple: Issue the loan, aka give the borrower the money they requested. Document the loan/investment somewhere that’s accessible for the family (perhaps a family P2P lending bulletin board or on the refrigerator) in a simple format—loan amount, interest, and repayment plan.
    More complex: The same—issue the loan. You can make a household P2P lending “portfolio” for each child to keep track of their investments and—if you’re savvy enough to do so—you can help them to graph their earned returns.
  5. Simple: Follow the plan, and ensure that the loan is repaid (and that no fights break out). Keep track of these in an easy-to-understand booklet or computer file.
    More complex: The same—follow the plan, and ensure that the loan is repaid. At this time, you can go over the investment and loan with your children, talk about any problems, what went right and what went wrong, and put the information into their portfolio.

interest calculation

As each family is different, you can develop your own system using the steps outlined above as strictly or as loosely as you’d like. Regardless of your method, we think a household P2P lending system can be an interesting and fun way to teach your kids about finances, investing, and interest. They’ll be on the road to financial success in no time!

Success - Bondora

Would you try implementing a household P2P lending system with your family? Let us know in the comments.