Peer to Peer Lending 101

For anyone wanting to obtain a personal, business, or property loan or for anyone with extra cash and wants to invest, using peer to peer lending service is a great alternative to the traditional institutions such as banks and credit societies. But seeing as it is still a new concept, P2P lending (also Crowdlending) may be unfamiliar to most people.

In today’s post, we will be taking a closer look at peer to peer lending 101; meaning everything that is there to know about the sector so that you can decide if investing in the P2P lending sector is perfect for you.

What is peer to peer lending?

Peer to peer lending or Crowdlending can also be referred to as non-bank banking.

That means that it is a process of lending and borrowing money that takes place via an online platform without the use of traditional banks. Borrowers visit an online platform looking for loans with better terms than they usually get from their local banks, while investors come to the platform looking to invest their money at much higher rates of return than what they normally get from their bank savings.

Peer to peer lending simply brings together borrowers and lenders on the same platform. The model is such that it eliminates the middle man, which in most cases is the bank. For this reason, the platforms significantly reduce the overheads, which are channeled to benefit the lenders and borrowers. That is why borrowers can get loans at 10% rates while investors receive somewhere between 8% and 14% return on their investment.

How P2P Works

Peer to peer lending simply matches up the individuals or businesses looking to borrow money with individuals or institutions with extra funds to lend. Investors can start their portfolio with as little as 10 pounds and can choose the terms of the loan.

Some Crowdlending platforms allow you to select the borrowers that you want to lend your money to, or the platform can handle this for you so you just sit back and earn.

What returns could you make?

The rate of returns depends on the length of your investment term. This means the longer you invest, the higher the returns will make. On average, Crowdlending platforms offer between 5% and 14% per a

What are the risks?

Before making any investment, you need to understand the risks associated. Just like any form of investment, P2P lending also has its own risks. But because in Crowdlending you can diversify your investment across different loans, your losses will be balanced by other earnings if a borrower defaults on their payments.

Alongside diversification, peer to peer lending also features a number of other protections for investors. Some platforms set aside reserve funds that can help cover any losses to investors caused by borrowers defaulting. Also, Crowdlending is regulated by the Financial Conduct Authority, which compels the platforms to put measures in place that safeguards investors’ money.

How to maximize your profits

With peer to peer lending, you can maximize your gains if you know how to. But the only guaranteed trick is to invest for the longest period possible.

While most of the P2P lending allows you to withdraw your money earnings earlier for free, if you want to maximize your profits, you should be looking at reinvesting right away to earn higher returns. Also, you can just leave your funds so that it can attract as much higher returns as possible.

Benefits of investing in P2P lending loans

There are numerous benefits of investing in Crowdlending loans, including:

  • Limited credit risk as investors can sell unpaid loans. 
  • A larger amount of funds can be quickly invested since there are numerous types of loans.
  • Investors can diversify their portfolio based on currency or geographical to reduce risk.
  • High rates of returns in investments compared to banks and other financial systems.
  • Some peer to peer platforms have loan buy-back option.
  • Investors can reinvest their money or quickly withdraw for free.