You may have heard of Lending Club or Prosper as another type of investment. Through these companies, you can also invest in a type of note, but there are some key differences.
Generally through Peer Lending sites, you have the opportunity to buy a small portion of many different notes, instead of the whole thing. If I want to invest $5000, I might divide it into $25 chunks and buy a small piece of 200 different notes. This is the ultimate diversification, as if a few of these notes are defaulted on, it will barely effect my return. In a dream case scenario, all your notes perform and you can earn a return around the same as I do with mortgage notes, somewhere in the 12-15% range. The problem is that dream scenario is just that, a dream. Realistically, the notes that you would need in to get the high return are higher risk notes where the borrowers have poor credit. A large portion of these notes are likely to default, which will drag down your return. I actually did do a little investing with Lending Club before I got into mortgage notes and my average return is around 7.4%. This is NOT a bad return when compared to some other investments (bonds, CDs, etc.), but I can do twice as well with notes.
As I mentioned, the higher return Lending Club or Prosper notes are associated with higher risk borrowers. This can also be the case, of course, with higher return mortgage notes. They would not be available at a discount that results in a 14% yield if the borrowers have a perfect credit rating and payment history. The difference, is that mortgage notes are backed by the property! If a mortgage note fails to pay, you can foreclose on the property and usually recover most of your investment. If a Peer Lending borrower defaults, there’s very little you can do. Theoretically you could sue them to try to recover your money, but this is hardly worth it for your $25. That’s the major difference and why I no longer invest in peer lending.
That said, Peer Lending is overall not a terrible investment and with enough diversification it seems you’re unlikely to lose money. There is also a low barrier to entry. Realistically to buy a mortgage note you would need at least 15-20K (more for the majority of notes, but there is a market at that low end). You can start with peer lending with just a few thousand dollars. This will surely give you a better return than a savings account and can be a great way to get started with notes, and to supplement your stock portfolio.