Peer to peer lending is a form of direct lending in which investors can lend money directly to potential borrowers through p2p platforms. By cutting the banks from the middle, this type of lending allows investors to earn high returns on investment. At the same time, borrowers can benefit from convenient and flexible loans that can be used for a number of purposes. P2p lending offers both secured and unsecured loans; most p2p loans are unsecured personal loans. At the same time, secured loans, also known as p2p bridging loans, have fewer risks because they are secured against the properties of borrowers.
How Does It Work?
Peer to peer lending is a straightforward process, and it is an online investment carried out via p2p platforms. These platforms manage all the processes from credit assessment to matching borrowers and granting loans to collecting repayments. As an investor, you need to select a platform and make an account. After making an account, deposit funds and start lending. You can also set criteria and select a loan in which you want to invest your money. It is better to spread your capital across multiple loans to avoid the risk of losing money. Some platforms also offer auto-invest through which your investment is automatically spread in small chunks.
As a potential borrower, you need to complete an application form on the peer to peer lending platform. The platform assesses your application and checks your creditworthiness, and then you are assigned an appropriate interest rate. The borrowers can evaluate the suggested option and select one that suits them the most. Borrowers are responsible for paying interest rates in monthly instalments and repaying the loan amount at the end of the loan term.
Pros And Cons Of P2p Lending
Peer to peer lending offers several advantages to investors and borrowers. Borrowers who find it challenging to get a loan from banks due to poor credit scores can also get p2p loans. Moreover, p2p loans provide quick access to cash compared to traditional bank loans. Other advantages of p2p lending are as follows:
Ease And Flexibility
As all the processes of p2p lending are online, investors find it easy to invest without going to the agent’s office or bank. Moreover, they can invest in different types of loans such as personal loans, business loans or bridging loan.
In this environment of low interest rates, p2p loans prove to be beneficial for investors by providing them with a high rate of returns. Investors even state that they earn double-digit profit per year.
Passive Income Source
When you lend money through peer to peer lending, you can receive your money back as monthly instalments along with interest rates. So it can be your passive source of income.
Along with the benefits peer to peer lending has some drawbacks that you should keep in mind.
Most of the borrowers who are applying for the peer to peer loans have low credit scores that are why there is high credit risk. If a borrower defaults, you may lose your investment.
No Government Protection
Peer to peer loans are not protected by the Financial Services Compensation Scheme (FSCS), so there are chances of losing all the money if borrowers default.