What is Peer To Peer Lending and How To Invest In It

Updated: Jan 15



Commonly known as P2P lending, Crowdlending, or Social Lending, this form of lending is mostly informal and decentralized. Peer to Peer lending is a model that facilitates credit transactions while eliminating the need for financial intermediaries such as banks.

This model enables an individual lender to lend all or part of a loan that a borrower might require. This is a another way you can receive passive income.

History of Peer to Peer Lending

The global economic crisis of 2008 dipped the whole world into a financial meltdown (especially real estate). During this period, banks shut down all lending operations. Apart from the few selected customers of the banks, the remaining clients could not secure any loans from the traditional financial institutions that were always at the disposal of people for obtaining credit and cash.

During this time, newly emerging websites for peer-to-peer (P2P) online loans were able to deal with the demands of cash and credit. The P2P lending industry's rapid growth was observed in the middle part of 2017, with almost $32.8 billion in loans.

That's quite a massive amount for an industry that was not even in existence a few years ago!

Peer to Peer (P2P) lending emerged as a form of crowdfunding initiative in which loans were built up by drawing investments from willing investors for people that needed the loans, i.e., borrowers. A basic idea of the P2P lending platform shows that it provides individuals with the facility to lend and borrow money without the intervention of any financial institution.

This platform can help borrowers not get loans from conventional financial institutions and is associated primarily with the rationale of allowing investors to get better interest returns on their money by lending it out. Borrowers could be able to get the loans at significantly lower interest rates.

The platform requires investors and borrowers to register before participating in any form of borrowing or lending activity, followed by conducting due diligence for both parties. This helps in determining the eligibility of both parties to invest and borrow money. All the P2P platforms have been recently classified as non-banking financial companies. Therefore they would be subject to the RBI mandates, especially for obtaining a license to establish a P2P platform. 

Types of Peer to Peer Lending;

Property Lending


Property lending is also one of the notable types of P2P lending that loans individuals or limited companies. The loans are secured with the facility of a first legal charge on a residential or commercial property registered at the land registry. In case of the borrower's inability to repaying the loan, the P2P platform holds privileges for repossessing and selling the property to recover the loan.

The common uses of property P2P lending can be observed for personal mortgages, commercial loans, or refurbishment and residential facilities development.



Consumer Lending


Consumer lending was the starting point for the P2P lending industry and is primarily associated with providing small and unsecured loans to individuals. The loan amount in personal P2P lending could go up to $40000 and be higher in some instances.

Consumer lending has found noticeable and productive applications in funding for purchases and debt consolidation from other expensive credit forms.

SME Lending


The SME P2P lending platforms are associated with providing small loans to small businesses and limited companies engaged in trading. The loans can be either secured or unsecured depending on the company's assets and the facility of personal guarantee on behalf of directors or shareholders.

SME P2P lending platforms are observed for procuring working capital, asset financing, and business expansion ventures.


Below is a list of Peer Peer lending platforms that offer excellent services.

Funding Circle

Funding Circle is a P2P lending site that has been around since 2010 and has already racked up over 100,000 investors. The company focuses on finding investors for small business loans. As a Funding Circle investor, your loans are given to established businesses that have been around for more than three years and with FICO scores above 660.

Benefits

· Borrowers have instant access to funds.

· Investors have additional security from lending to small businesses.

  • Peerform

Peerform was established in 2010 by a group of Wall Street Executives. It is one of the sites that have low rates for borrowers and decent returns for investors. However, the maximum loan amount here is only $25,000.

Benefits

· Low-interest rates for borrowers.

· Lower FICO score requirements for borrowers.

· Stricter fraud prevention measures.



Constant

Constant is a relatively new peer to peer lending platform that has become popular in the United States. It is one of the best Prosper alternatives because of its unique business model. On Constant, you can invest using fiat and cryptocurrencies and transfer funds seamlessly between them.

All lending on constant is backed by borrower collateral or buy-back guarantee. They also have concise terms for locking in funds. These range anywhere from their anytime-withdrawal lending pool investments to one-year terms depending on the investment you choose.

Benefits

· Loans secured by collateral.

· It's a global platform.

· Many investment options.

· 7.5% APR for both investors.


Lending Club

LendingClub is one of the leading platforms that has issued more than $50 billion in loans over the years. It has over three million investors and borrowers and allows borrowers with credit scores of 600 and above to apply for loans.

Benefits

· Better investor interest rates.

· Lower late fees for borrowers.

· Lower FICO scores required for borrowers.

· Borrowers receive funds instantly.

Conclusion

What you probably notice when researching most P2P platforms similar to is a lack of collateral.

It's the P2P industry's not-so-secret weakness.

When platforms are based solely on the internet and lend to borrowers across the country, it's hard to secure loans with collateral.

Hopping across state lines and repossessing property during a default is easier said than done, and it's quite costly. In a worst-case scenario, investors are unlikely to see a cent. That's why, today, many investors want a platform that offers fully-secured loans. 

If you are interested in other ways of investing please click here

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