P2P Lending is one of the newest alternative investment options that is growing fast. It offers fixed returns return with a downside of the risk that people will not pay their credit. Essentially by investing in these platforms you act as a bank.
What is P2P Lending
P2P lending (Peer to peer lending) lets you invest money by lending it to someone in need of it in return for a fixed interest rate.
P2P Lending platform acts as a middleman analyzing people who want to borrow money, giving them a risk rating, and checking other financials.
People who want to borrow money can apply for credit pretty much the same way as in banks and compare offers from everywhere else to get a better interest rate.
How Big is the P2P market
The P2P lending market was worth 83.79 billion US Dollars in 2021. This number is projected to rise to 705.81 billion US Dollars in 2030 according to Precedenceresearch.
History of P2P Lending
P2P Lending started only in 2005. However, at first, it was looked as a place where you would get a loan if nobody else would give it to you.
As this view was changed P2P lending market started growing.
Moreover, when the 2008 housing market crashed new regulations were introduced in the US making investments safer.
By then banks would not want to lend money to everyone and raised interest rates. This allowed the P2P market to grow even more.
P2P Lending vs Banks
Nowadays there are a lot of similarities between P2P lending platforms and banks.
All of them are checking your credit score, and your background, assigning you a risk score.
These are the main differences:
- Documentation process
The documentation process is much easier with P2P platforms than with banks. This can save a lot of time for borrowers.
- A lower credit score required
P2P platforms do not require as good credit scores as banks. It does not mean that they do not care about it. Simply a higher risk rate is applied which means that for the higher risk you can earn more money.
What P2P Lending Platforms are Responsible For
For the most part, the P2P platform enables buyers and lenders to exchange money for interest providing all necessary information.
- List all the loans and make financial transactions
Loans are seen on the P2P platform for investors to put their money into. The financing process might take a few days depending on the sum or whether people think that it is a good investment.
- Complete financial background checks on all participants
P2P lending platforms offer a place for people to apply for credit. After they do that P2P platforms review requests. I must mention that platforms also do checks on investors.
- Asses and update risk rating on loans
If a loan application is approved the risk rating is given for a loan. This has a direct effect on what interest rates will be offered.
- Assist lender to retrieve money
If something goes wrong P2P platforms also help lenders to get their money back if possible.
- Enable collections
P2P platform helps to make payments easier and safer between all parties.
Risks of P2P Lending
The main risk as with every other investment form is losing money. This could happen if the P2P platform goes bankrupt or the borrower fails to make payments for loans.
The first case is quite unlikely if you choose a well-established P2P platform.
The borrowers’ default is a much higher risk. The higher the interest rates are the higher risk it is. It is important to see how much of the investment was covered by the borrower. Usually, the sum is 0. However, if the platform works with real estate then it is a different story.
Why You Should Invest in P2P Platforms
- Good diversification in your portfolio
When investing it is important to diversify your portfolio. Personally, I consider this investment close to bond investments.
It will not get you any exciting 10x returns, however, depending on the platform it can get you 8-12% returns annually. Which actually lands close to S&P 500 average annual return.
- Stable payments
It is very predictable when you will get payments or when a loan will be paid in full. Sometimes people even return their loans faster, but interest rates are the same as if they were paid according to schedule.
This is great because actual returns can be even higher if you reinvest that sum into other loans.
How To Choose a P2P Lending Platform
There are a lot of articles out there covering every aspect of P2P platforms that can help you choose the best platform for you. For example, you can check P2Pempire.com
Personaly, I invest in Estateguru.co. This platform specializes in real estate to both P2P and P2B (Peer to Business).
Furthermore, it is very easy to invest in the platform as it offers automatic investments according to your criteria. For me, the main criteria are:
- High intetesrest rates
I think this is self-explanatory. I want as much return as possible.
- Good own-money coverage
In case the borrower defaults I want to get as much money as possible back.
- Non-recurring loan
If it is a recurring loan from the same borrower I try to avoid these as I see them as higher risk. Also, I wouldn’t want to invest in the same borrower twice as this would hurt diversification.
This is my only stable investment that never had a down month. However, even as I try to invest in 11-13% interest loans annually my return is a bit over 8%. This is mainly because in Estateguru investments are usually for 1-3 years. Also, some of the borrowers may default.
That is why it is very important not to put all your money on one loan.
How To Start Investing in a P2P Platform
To start investing in P2P platforms all you need is an identification document to register. After your identity is verified you can transfer your funds to a P2P platform and start investing.
In total this can take 1-3 days.
Restrictions of P2P Investing
Some countries do regulate P2P investing and some even completely banned them. For example, you cannot invest in P2P lending platforms if you live in Iowa, North Carolina, or New Mexico states in the US.
Conclusion
Firstly, P2P platforms are a good alternative investment in your portfolio which can offer more stability than the stock market.
Secondly, I consider P2P platforms a safer option than the stock market and I personally invest in one of them.
Moreover, it is very easy to start investing in P2P platforms.
In the next 8 years, the P2P lending market is forecasted to grow more than 9 times.
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