A Comprehensive Guide to Peer to Peer Lending
Updated on September 7, 2021 | by James Wilson
Peer-to-peer lending is fairly a new concept but has become very popular in the UK. It is also known as p2p lending, and in this type of lending, loans are funded by individual investors. With every passing day, more and more investors are getting into this type of lending due to high-interest rates. If you are thinking of investing in p2p lending, keep reading to know what it is and how it works.
What is Peer to Peer Lending?
Peer-to-peer lending is a way in which investors lend money directly to potential borrowers. It is considered a great alternative to traditional loans from banks. This type of lending is beneficial for both investors and borrowers. First of all, no bank or financial institution is involved, so there are no overhead charges. Investors can earn high returns as compared to conventional loans. At the same time, borrowers can get funds easily when they find it challenging to get loans from banks or other financial institutions. Through p2p lending, you can invest in different types of loans and can lend money to individuals as well as businesses.
Also Read: How to Buy Bitcoin Without a Bank Account
How Does P2p Lending Work?
Peer-to-peer lending is carried out through online peer-to-peer platforms. There are a number of platforms present in the UK. These platforms act as the middleman and do all the hard work for you, from arranging loans to managing loan repayments. These platforms earn money by charging fees from investors and borrowers. To start investing, you have to choose a platform and make an account on that platform. Once your account is open, you can deposit funds and start lending. You can also set lending criteria and also choose borrowers. Peer-to-peer platforms match you with creditworthy borrowers, and in most cases, you can start earning from the next month of your investment.
If you are a borrower and want to borrow money through a p2p platform, you have to fill an application form and provide the necessary documents. These platforms check your creditworthiness and offer a loan matching your requirements.
Is It Worth Investing in P2p Lending?
In an environment where other investments offer a low-interest rate, p2p lending provides a source to earn high interest. Let’s see what benefits peer-to-peer lending can provide to investors.
P2p lending is user-friendly as compared to traditional investment methods. All the p2p platforms are online. That is why investors find it easy to invest. All the processes, from making an account to investing deposits and lending money to getting repayments, are online, and there is no need to go to an agent or financial expert to start an investment.
A significant advantage of peer-to-peer lending is diversification that helps investors to reduce the risks. P2p lending allows investors to invest money in multiple loans instead of investing in a single loan. For example, when you invest in a single loan, there are more chances of losing your capital in case the borrower defaults. On the other hand, when you invest in multiple loans, if one borrower defaults, you can still earn profit from other loans.
High Return Rates
It is the major advantage of peer-to-peer lending that it offers a high rate of return. Many investors state that they even earn double-digit returns per year. Some lenders start getting monthly payments from the next month of investment, thus, you can make it a steady source of income.
When you invest in p2p lending, you have the option to choose from a variety of loans. Moreover, you can set criteria and select borrowers. This way, you have more control over your money compared to traditional loans or saving accounts.
Is It Safe to Invest in Peer to Peer Lending?
Although p2p lending is different from other investments, it also has some risks that you must consider before investing. Following are some risks that are associated with the peer-to-peer investment.
The major drawback or risk while investing in p2p lending is borrowers default. Most p2p loans are unsecured, so when a borrower defaults, you may lose all your money. However, some platforms have contingency funds to provide a cover to lenders if any borrower defaults. But this fund is of no use if multiple borrowers default at the same time.
Platform Goes Bust
When a p2p platform or site goes bust, investors may find it difficult to get their money back. It can also happen that the platform takes too many loans and can not be taken to repay. This way, the lending site becomes bankrupt. However, the chances of such risks are lower compared to the risk of default.
No Government Protection
Peer-to-peer loans are not protected by the Financial Services Compensation Scheme. It means if you lose your investment, the government is not responsible for compensating for your loss. But the good thing is that all the p2p platforms are regulated by the Financial Conduct Authority (FCA), so they have to follow best lending practices.
Now that you know most of the things about peer-to-peer lending. It is easier for you to decide whether you should invest in p2p loans or not. However, whenever investing in p2p lending, you must choose a well-reputed platform to avoid any inconvenience in the future.