Peer-to-peer lending, or P2P in short – also known as crowdlending – is the practice of collectively lending funds to individuals or businesses via online platforms or service providers – bypassing banks and other financial institutions.
That’s a fancy way of saying that many investors get together on financing a loan – instead of one banking institution.
P2P lending platforms are connecting lenders to borrowers. They operate at a rather cheap overhead compared to traditional financial entities and do not levy heavy fees. P2P platforms also offer significantly higher returns on investments compared to banks and are an attractive alternative (or addition) to stocks, bonds, real estate and savings accounts.
P2P lending is a relatively new concept
The earliest forms of peer to peer lending surfaced in the United Kingdom back in 2005. The first company to start this service was Zopa, which has to date issued loans for close to 2 billion pounds. Many early lending platforms had lower thresholds for loan eligibility, resulting in high default rates. Since 2014, many lending companies have emerged and registered with the Financial Conduct Authority and similar national financial regulative agencies.
In countries all around the globe P2P has sprung up to service billions of loans to countless borrowers. To many borrowers as well as lenders, this concept is preferred over traditional banking services.
Hvad are P2P lending platforms?
P2P lending platforms are online based-entities that convey contact between lenders and borrowers. The loans can be unsecured or backed by real estate, car, jewelry, or any other property.
Interest rates can be set by the platforms or by lenders themselves. They also schedule payments in either monthly installments or one balloon payment at term end.
Lending platforms make their revenue through fees collected from funding borrower’s loans and/or (less commonly) fees collected from servicing investors.
P2P lending versus banks
Banks and other traditional financial Institutions remain more secure, but they also provide next to no return these days. Due to inflation, keeping money in the bank will often decrease your purchase power rather than growing your wealth.
Why is P2P lending an attractive option for borrowers?
In many countries interest rates offered by banks to consumers and small businesses are through the roof. Thus for borrowers, P2P lending is a cost effective alternative to traditional loan financing. The P2P lending industry also takes pride in being transparent and not charge hidden fees.
Some investors opt for P2P lending if they are unable to access traditional bank loans. This in particular is the case for small startup businesses, as most banks are vary of lending to young businesses.
Although P2P platforms also require an approval process, they often let investors decide. And, unlike banks, many investors happily lend money to new businesses, either out of ideological reasons or because of attractive interest rates.
Often P2P lending platforms will accept mortgage backing for loans, that would have otherwise been refused by traditional financial institutions.
Why is P2P lending an attractive option for investors?
To investors P2P lending is advantageous, because they can profit on high returns. Although interests are competitive, it also allows the investor to “be his own bank” and charge rates not far below those charged by the established banking institutions.
P2P lending is also preferred by those who take an interest in managing their finances and who wish to easily track their investments. Furthermore, investors can utilize the huge lending market to divide their investments among hundreds of loans and multiple lending platforms, thereby minimizing risk.
In addition, many young investors or others new to the investing scene can start investing with very little starting capital. While property investments and stock trading requires substantial resources, it’s possible to get started in P2P lending with as little as € 5.
Another benefit of P2P lending is, that lenders receive returns very early on – often within two months of their first investment. In addition, P2P lending provides a more steady income flow compared to the highly fluctuating stock market.
As is the case in all investing, P2P lenders do face the risk of losses due to loans defaults. Although this risk can be greatly reduced by investing in loans with buyback guarantee and setting up a diversified portfolio.