Glossary of P2P lending terms

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Glossary of P2P lending terms

Commonly abbreviated as P2P, Peer To Peer Lending is the practice of lending money to unrelated individuals, or "peers", without going through a traditional financial intermediary such as a bank or other traditional financial institution.

This is a glossary of terms giving you a peer-to-peer lending definitions.

Type of Loans

Different Peer-to-Peer lending platforms lend money to different borrowers. The main uses of loans are business loans, car loans, invoice financing, mortgage loans, personal loans, promissory notes and property loans. Whilst some platforms specialize in one loan type, many platforms lend across multiple different borrower types.

Business Loans

A business loan is a loan specifically intended for business purposes. As with all loans, it involves the creation of a debt, which will be repaid with added interest.

Car Loans

A car loan (also known as an automobile loan, or auto loan) is a sum of money a consumer borrows in order to purchase a car. Generally speaking, a loan is an amount of money that is lent to an individual, a business, or another entity.

Invoice Financing

Invoice financing helps businesses improve cash flow, pay employees and suppliers, and reinvest in operations and growth earlier than they could if they had to wait until their customers paid them. Businesses pay a percentage of the invoice amount to the lender as a fee for borrowing the money.

Mortgage Loans

A mortgage is a loan in which property or real estate is used as collateral. The borrower enters into an agreement with the lender wherein the borrower receives cash upfront then makes payments over a set time span until he pays back the lender in full.

Personal Loans

This is a loan that is granted for personal use; usually unsecured and based on the borrower's integrity and ability to pay.

Promissory Notes

A promissory note is simply a "promise to pay." It contains a maker (the payor) and a lender (the payee). An unsecured promissory note is not attached to anything, the loan is made based on the maker's ability to repay. A secured promissory note may also be made based on the maker's ability to repay, but it is secured by a thing of value such as a car or a house.

Property loans

Property loans are related to development projects, issued to companies specializing in real estate development projects. From a legal point of view, they do not differ from investing in other loans. A classic example is a situation when a loan issued to developer for acquiring a land plot (bringing communications, developing a technical project, etc.)

Protection Scheme

Unlike bank deposits, peer-to-peer lending is treated legally as investment and the repayment in case of borrower defaulting is not guaranteed by government. Some peer-to-peer lending platforms offer different types of protection schemes to reduce the risks of bad loans.

Buyback Guarantee

A buyback guarantee is a guarantee issued by the loan originator to the investor for a particular loan, that confirms the loan originator will repurchase the loan from the investor if that particular loan is delayed. If a loan with a buyback guarantee is delayed by more than a number of days which differ in each platform, the loan is automatically bought back by the loan originator from the investor at the nominal value of the outstanding principal, plus accrued interest income.

Buyback guarantee is stipulated in the agreements between the Platform and credit organizations.


This means that if a borrower defaults, the lender will be able to claim the collateral (e.g. property or vehicle) that the borrower has provided. If the borrower does not repay their loan then the collateral can be sold to cover any shortfall.

Collateral may be real estate in the case of a mortgage loan, a vehicle in the case of a car loan, or equipment in the case of a business loan, as well as many other types of collateral, as indicated under each loan.

Personal Guarantee

For certain loans (e.g. business loans), other credit enhancements are obtained, such as a personal guarantee. It includes, for example, real estate objects, cars, company assets or shares, personal guarantee or third-party guarantees.

Provision Fund

Some Peer-to-Peer lending platforms operate internal reserve funds which are designed to protect the lenders against losses in the event that a borrower defaults on their repayment obligations. Reserve fund sizes and their terms vary between platforms. Reserve funds are not compulsory and there are no guarantees over their effectiveness.

Early Exit

Secondary market allows individual lenders to buy and sell loan from or to other individual lenders. Secondary markets are designed to allow lenders to sell-out on their loans before the loan term has finished, allowing them to withdraw funds sooner than they would otherwise be able to.

However, a successful sell-out requires both a willing buyer and willing seller and there are no guarantees that a buyer will be found. Where a buyer is found the selling lender may need to take a discount on the value of the loan at the point at which they wish to sell-out. Platform fees may also be applied on any loan fractions traded, on the part of the buyer, the seller, or both.


Some Peer-to-Peer lending platforms are open to international investors depending on which country you reside in or which citizenship you hold.


Auto Invest is a feature that allows you to invest your funds automatically Auto Invest automatically implements your chosen investment strategy. After you have entered your investment criteria, Auto Invest will automatically invest in suitable loans. Auto Invest is a very effective tool for saving time spent on investment activities. It also allows you to access newly placed loans in the system before manually-made investments.

Default Rate

A borrower is said to have defaulted when it fails (for any reason) to meet its repayment obligations – such as missing a monthly repayment installment. Default rates are generally used to measure the average rate at which borrowers are expected to default across a given Peer-to-Peer lending platform. Default rates are generally derived from historical data and therefore cannot be used to predict the future default rate of a platform with any certainty.

Loan to Value Ratio (LTV)

When there is a collateral securing the loan. A loan to value (LTV) ratio is a number that describes the size of a loan compared to the value of the asset securing the loan. A higher LTV ratio suggests more risk because the assets behind the loan are less likely to pay off the loan

Diversification of Risk

Within Peer-to-Peer lending, diversification of risk is the concept of spreading loan capital across a large number of different borrowers, in order to minimise the impact to the lender of any one borrower defaulting on his or her repayment obligation.

Tagged in: p2p lending
I like to take risks, That's how I make money. But they are calculated risks.


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Guest Friday, 21 September 2018