What is P2P Lending?
Peer to peer lending as abbreviated as P2P lending is the practice of lending money to different unrelated people without going through traditional banking institutions processes. All the activities take place online on the companies’ websites after going through bad credit checking tools and using different lending platforms.
According to the Wikipedia definition, this is the practice of borrowing funds for individual borrowers or businesses through an online platform that directly connects them with lenders. Companies providing such peer-to-peer loans work entirely online, with their lower operating costs allowing them to borrow money - very often at a far lower price than traditional financial institutions.
Thus, borrowers benefit from lower interest rates, and lenders achieve higher returns on their capital than other savings products.
The service providers (P2P lending platform) receive a percentage of the loan amount against their brokerage services. Their function is in practice to meet potential borrowers and lenders. Most of these types of loans are unsecured loans, most of which are aimed at small business.
Interest rates on loans are often determined by lenders based on the reverse auctions model or the lowest interest rate on which they lent their funds. Another way may be based on a fixed interest rate, depending on the credit score and credit rating.
On some peer-to-peer lending platforms, in order to reduce the risk and volume of bad loans and bad credit, creditors themselves decide whether to allocate funds to a borrower or not.
How has the business started?
After the end of the financial crisis, borrowers began to look for lower interest rates and access to credit. On the other hand, lenders were looking for a higher return on their investment. Banks, struggling with tight regulation, have encountered serious obstacles to meeting the growing market needs.
This created a serious vacuum in peer-to-peer lending, filled with peer to peer lending sites and real estate crowdfunding platforms. They are characterized by a lower level of regulation because they are intermediaries in the relationship between creditors and borrowers.
The peer-to-peer lending industry has seen significant growth, especially in developed countries with advanced financial markets. In the United States, Lending Club started at the end of 2007, Lending Club have survived the 2008 recession. These platforms have granted 6.6 billion in loans, or 128% growth over the past year, with the country's largest volume market. One could argue that P2P loans might not even be around today if it was not for Lending Club.
In terms of the amount of single credit granted, however, the United Kingdom is ahead of the US, with the size of 72% larger. As of 2019 Funding Circle has facilitated over £7 billion in loans to small businesses. Experts believe that Europe is the next region in which this type of lending will experience a real boom.
Alternative financial markets on the Old Continent reached a volume of nearly € 3 billion in 2014, an increase of 144% on an annual basis, according to the same Business Insider survey.
In France, for example, the small market for P2P-lending has grown by 4,000% in the past year to € 8,2 million. This type of peer-to-peer lending is already gaining momentum in countries such as Germany, Sweden and the Netherlands.
Why Many People are Benefiting from P2P Banking
Whether you are looking for a personal loan, business loan, students loans, credit card debt consolidation or some type of banking investment, P2P banking is one of the best options for most people. If you are new to the idea of peer-to-peer banking, you probably do not know what it is all about or what types of information happens to be available. This is why it might be a good idea for you to consider this option if you want to get a great rate for any type of loan that you will be able to find from any local financial company.
One of the main benefits to P2P banking is that you will be able to find competitive loan rates. The main problem with going to a local bank for your personal loan or credit debt consolidation is that they all pretty much offer the same type of rate. This rate can be incredibly high and difficult to afford. When you are making use of peer-to-peer banking, you will be met with competitive rates and not have to worry that you are spending a small fortune on it all.
Peer to peer lending sites for borrowers – not sure where to start?
The first step that you will want to take is to find a company that offers peer-to-peer banking options. These will allow members to offer loans to other individuals at great rates. In general, this type of banking acts a bit like an auction and people will bet on best personal loans depending on the interest rate that is offered.
Because of this, the process of getting a loan like this can be a bit competitive, Lending Club and Prosper claimed that less than 10% of their loan applications were actually funded. But it is well worth it when you are able to get the loan that you need to get on with your financial life or investments. You will also feel confident in knowing that your choice on a loan is met with amazing interest rates.
Unlike typical banks, you can find great rates with this type of banking. Between loans to investments, peer-to-peer banking options are ideal for all types of people. You can quickly get the financial needs that you want without all of the problems that go with getting approved by a bank.
The auction-type loans will help you to get an amazing rate without worrying that it is going to be too pricey. You will want to consider working with a financial expert if you need information on beginning the process of peer-to-peer banking. If you are new to the concept, it is always best that you get help from an expert in this field.
You will love that banking with peers can be a great way to get rates and loans that are perfect for your needs. You will love that you do not have to worry about getting a high interest loan offered by local banks because they are less lenient with their interest rates. Your loan should be something that helps you financially and not something that is going to become a problem for you when it comes to paying it back. This is why so many people have been choosing peer-to-peer banking for their own needs and any type of loan that they might need to take out at the moment in order to get some extra funds.
Peer to peer lending sites for investors– Which Is better, a aavings account or peer-to-peer lending?
People often worry about how they will manage to save enough money for larger expenses down the road, for retirement and or for any number of other issues. In fact, the concern about being able to save enough money to live comfortably is one of the major stresses that weighs on the minds of most individuals. If you are one of those individuals, you might be wondering whether you should put your money in a bank account and forget about it or get involved in peer-to-peer lending, also referred to as P2P lending.
The truth is, there are advantages and disadvantages to both of these systems. With that being said, it is vitally important that you fully understand what the potential benefits and risks of each one are so that you can make an educated decision concerning your future.
Advantages and disadvantages of deposit account
A lot of people put their money in a savings account and hope for the best. It is understandable because this is the safest method of saving for the future. Unlike stocks and bonds, you don’t have to worry about having more money than you know what to do with one day and then having it all wiped out through no fault of your own the next. For many people, this alone is enough to make them decide what to do.
However, you might not have considered the idea that when you put money in a interest bearing account account, any money that goes into the account is largely what you are capable of putting there yourself. This means that you are taking a chunk of money out of your own paycheck in order to have any hope of saving money for the future. Money that is earned from the cash that is already sitting in the account is typically not even enough to get your attention. This means that your money is not working for you when that is exactly what it should be doing.
Essentially, this is a form of lending that uses a certain platform in order to help people decide which businesses they should invest in. It is safer than typical stocks and bonds and there are several other things about this type of lending that are quite beneficial. For one thing, you have greater control over your decisions and thus, over your money.
There is also the potential for greater earnings because you are directly involved with the business that you choose. If it does well, so do you. Because you have a personal finance stake in it, it gives you more control over choosing a business that will be successful in the future. It also gives you the opportunity to be involved in selected businesses that you have a genuine interest in.
Of course, there are risks involved in everything, especially things that are really worth doing. When it comes to peer-to-peer lending, the risk is that you will invest in a small business that might fail. If it does, you might not get a return on your investment like you had expected. This is especially true if the small business fails shortly after you have made the decision to invest because it gives you very little time to recoup any of that money. These risks can be minimized by doing your homework and investing in businesses that have a proven track record.
The very idea of taking risks with your money is a little frightening. However, people that are unwilling to take risks are usually the ones that end up paying the price for it in the end. You have probably heard the saying that little risk offers little reward. For the most part, this is true. If you want to have the potential to grow your wealth and do it in the safest way possible, peer-to-peer lending is definitely something that you should look into.
Is peer to peer lending safe?
No one ever thought that one would be able to borrow money at the comfort of their house via the internet and get it instantly. But today, peer to peer investing services or crowd lending as it is commonly referred to, has come at a right time. P2P as it’s usually abbreviated, was innovated in the year 2005 by a firm Zopa in UK and since then it has welcomed and used in a number of countries and those who are said to have benefited much are the small sized business enterprises who were shunned down by the banks there before.
Benefits of peer to peer lending to the borrower
i. One is able to access a loan at the comfort of wherever one maybe provided there is internet connection.
ii. Most small scale business people and even students can now access student loans without much hustle compared to how they were treated by the banks in the past.
iii. Loan processing time isshort and easy.
iv. The interest rate is lower compared to other financial companies.
v. There is no rate increment, it’s a fixed amount, and in case one pays earlier than agreed there is no penalty charged.
vi. Lower charges for loan processing.
Benefits of peer to peer lending to the lender
i. One does not need to have an office, they are online services only.
ii. The interest charged which is lender’s return is substantial.
iii. One does not require to employ a number of professionals to look after the operations, only a few compared to what financial companies employ to run their various branches.
iv. Compared to other types of investments like in the security markets, peer topeer is more reliable, no fluctuations if well monitored and controlled.
v. When you lend to someone, you give that person some freedom unlike when dealing with the credit cards.
Everything has its pros and cons and p2p is no exception but its advantages surpasses its disadvantages. This service has so far transacted with lots of billions and some governments have used this channels to give money to the citizens, the future is bright.
It should be noted that to be able to eliminate the question of whether the op2p is safer, firm measures need to be undertaken to keep in check the default rate. It has been reported of some firms collapsing and moving out of business with a 100% default rate. It’s an alternative financial service provider and its operations has provided a passive way to earn some interest on cash and it’s a positive effect of technological advancement.
Will the P2P Lending Platform Survive?
The investment platform is going to manage well if people are going to be willing to invest. The problem today with the lending platform is that it looks more like charity than it does like a good idea. There are a lot of platforms that people do not think are safe, and there are even more people who want to have a more solid platform to use. You have to understand how the platform works before you would use it.
People are going to want to have a way of making sure that the personal loans are paid back because people want to help if they are going to be safe. This means that people are going to have to look into the protection plans that are going to make it much easier for people to get the help that they need. You might want to give people the money they need, but you want to be as protected as a bank. You want to have a contract and a platform where someone is going to pay you back.
There are a lot of people who are going to be able to read reviews that are going to tell them that some of these platforms are not going to be safe. People are going to get scared away from some of these platforms, and that is going to make it much easier for people to say no. People are going to have to dig deeper to make sure that you are going to go to the place that you are going to feel much better about where you are spending your money.
You want to be able to learn as much as you can about the people that you are loaning money to, and you want to find a P2P platform that is going to help you make sure that you are comfortable. You are going to want to feel much better, and you are going to be able to stay safe if you are doing a lot of lending. No one has tried to really make a business out of this yet, but the setup could help people make sure that they are going to do it right every time.
You have to make sure that you are going to use the companies that you believe in the most. A lot of these sites have missions that you will believe in, and you are going to have to make sure that you are going to pick out the company. This will help keep the platform alive, but that means that people are going to have to do some research to make sure that they are going to be lending to the right people.
Everyone who wants to lend on an investment platform needs to make sure that they are going to get better results by making sure that they have picked the right place to go. People that do not feel safe will not lend, and the industry is going to have to do some work to help make people feel as safe as possible when they are lending.
How can I make money with small business loans?
With peer-to-peer credit, you become a bank yourself and lend money to private individuals. Moreover, because you are not doing this out of pure charity, you are getting interest from the borrower. P2P lenders take over the brokering and merging of financiers and borrowers on the Internet.
In addition, the P2P credit platforms carry out a bad credit assessment of borrowers and their financing projects and credit history. The platform makes the result available to investors in a so-called credit score.
P2P loans offer investors high flexibility
Based on this fico score and your personal assessment of the borrower (the borrower presents himself and his financing project anonymized on the platform), you can make a decision for or against the investment. You can also decide on:
- The desired investment amount.
- The term of the investment
- Country (some platforms also offer foreign investment projects)
- The distribution of smaller amounts on several short-term loan applications
As a result, investing in peer-to-peer business loans is much more individual and flexible than traditional forms of investment with their often-long maturities and rigid terms.
The peer-to-peer loan doesn't work without a bank
All P2P lenders cooperate with a bank because it is regulated by law that only a credit institution with a full bank license is allowed to carry out banking transactions. The partner bank in the peer-to-peer loan is responsible for the transfer of money between the lender and the borrower.
As a rule, the bank charges for this a small percentage of the loan amount as a origination fee paid by the borrower.
What is the yield on peer-to-peer loans?
P2P credit platforms promise partial returns above 10%. Do not let it dazzle you. Experience shows that many investors have P2P loans in your portfolio that fail. This reduces the realistically expected return for investors to approximately 4 to 6%.
However, interest rates in P2P finance are still significantly higher than the return on traditional forms of investment.
We are still in a low interest rate phase. This benefits all those who borrow money, for example, to conclude a building financing or to take out a car loan. For investors, on the other hand, these are not good times.
Most traditional forms of investment, such as daily money or fixed time money, are still below the inflation rate in return. That is, while your money is in the account, it loses its value. Investing in P2P business loans can thus be a lucrative alternative to traditional low-interest investments.
Advantages and disadvantages of P2P finance
- High returns.
- Flexible maturities.
- Investment amount starting from 10 € is possible
- Possible investment in a large number of personal loans.
- Largely transparent and self-selectable portfolio.
- Individually controllable.
- Default risk.
- Erroneous assessment of the borrower's good credit worthiness.
- Insolvency of the P2P site.
P2P Platforms: How to Invest in P2P Loans
Step 1: Select a peer-to-peer platform
First, select a company on which you want to make your investment. Criteria by which you choose or against a platform can be:
- Year of creation: Be careful with young companies. Platforms that have been on the mark for a long time are usually more trustworthy.
- Insolvency of the P2P platform
- Headquarters: Platforms from Europe have the advantage that communication is easier in the event of a bankruptcy of the platform during judicial disputes.
- Investment Amount and Term: Check how much the investment amount is on the platform and what maturities are offered. Low investment amounts and short maturities enable high diversification and are therefore less risky.
- Platform Origination Fee: Check if the platform charges an origination fee for arranging a suitable loan application, some peer-to-peer credit platforms do so. Prosper and Lending Club do charge origination fees
If you have chosen a platform, register online. To do so, follow the instructions of the respective website.
Step 2: Select a P2P financing project
In the second step, select a project you want to invest in. The platform provides you with information on the individual loan requests: the person of the borrower about the project to be financed and — most importantly — the creditworthiness of the debtor.
Based on several hundred factors, including information from credit valuers, the platform creates an individual credit score for each loan application. This will give you guidance on how much the probability that a borrower will repay the money as expected.
The expected return is also based on the credit quality class and credit history. Good credit means low return prospects, but the risk of default is also low. A low credit rating, on the other hand, carries a high risk for your investment, but the expected return is also high.
Automatically invest through the P2P platform as an alternative to manually selecting investment projects, you can choose the automatic distribution of your capital by a portfolio manager on most platforms. The latter assigns your money to one or more credits.
To do this, you deposit once how much risk you want to take and how high the investment per loan should be at least and maximum. You can also decide whether you want to refinance your profits.
Step 3: Disburse your return
The disbursement of your return will be based on the platform you wish (that is, if you want to end your investment) or along with the capital used. If you want your money back before the end of the loan term, you can usually sell the loan to another lender for a small origination fee.
Failure Risk: What happens if a peer-to-peer loan fails?
So is Peer to Peer lending safe?. The P2P platforms promise some measures to mitigate the risk. In a first step, the platform will contact the debtor and try to find out why he did not pay. If this does not work, a reminder is issued by the intermediary partner bank. If the debtor still does not pay, the termination of the loan as well as the efforts of a collection agency follows.
The collection procedure is between the bank and the borrower. As an investor, you have no opportunity to contact the defaulting debtor, he remains anonymous. However, many platforms offer good transparency as to what stage the collection process is currently in progress, so that you can find out what your money is going on.
Particularly in view of the fact that P2P personal loans are mainly used by borrowers who have little or no chances in the traditional credit market, the risk of default in P2P lending must not be underestimated.
What is the buy-back guarantee for peer-to-peer loans?
Some P2P sites, such as FastInvest, offer a so-called buy-back guarantee. This promises to buy back delayed loans and interest accrued up to then from the defaulting debtor, so that the creditor is relieved.
However, as an investor, you must be aware that such a buy-back guarantee can also be cancelled. If credit losses accumulate on a platform, it can only cover it up to a certain point. After all, even the platform cannot afford to buy unlimited debts.
What happens if a P2P platform goes bankrupt?
A second, big risk is the platform itself. If the platform goes bankrupt, your capital is also inevitably gone. Many P2P platforms are relatively young and not yet on the market for very long. This means that they have little equity and can quickly become victims of bankruptcies.
When the platform publishes financial reports or statistics on their growth, lending volume, investors and default rates on its website, you should track the figures to assess the risk of bankruptcy.
Top 3 tips for your peer-to-peer investment strategy
From the risk of credit loss and the risk of platform players, the most important rules for investing money in P2P loans are also derived:
- Scatter the risk: This means that you should never invest your capital in just one project. The best is high diversification with small amounts. If a loan fails, the loss will be worsenable by the relatively small sum.
- Do not put all the eggs in one basket: invest on several P2P lenders. If a platform fails, you will not lose all your capital.
- Be patient: Especially if you invest many amounts as recommended, your investment needs time to develop. Give yourself this time and invest in a long and secure perspective rather than risk a lot in the short term.
The taxation of P2P interest income
There is still a pitfall that you absolutely need to know about peer-to-peer loans: Taking. Unlike, for example, stock profits, the withholding tax is not automatically withheld. As an investor, you are responsible for taxation of your profits from P2P loans and must prove the interest payments from each individual loan you have invested in.
Some platforms offer the compilation of all interest income as a service, while others require you to determine and sum up the income yourself.
When you decide to invest in small business loans, you should always consider the risk of default. The amount of money you invest in P2P loans ultimately depends on your total assets. In general, we recommend investing only sums where you could lose a total loss.