All About Peer-to-Peer Investment

The constant need for capital and extra cash either to start up or support a business or to settle problems cannot be over-emphasized. However, the rigorous and rigid conditions that come with getting this extra cash in form of loans pose a great problem to many as most times, these loans are inaccessible because of the inability of individuals to measure up or possess all the stated requirements needed to secure these loans. The answer to this problem is a framework called Peer-to-peer lending also known as P2P lending, or crowdlending. These platforms have since inception been an answer to many not just for borrowers seeking loans but for investors seeking an extra stream of income.

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What is P2P lending?

Peer-to-peer lending is a system that stands in or forms an interface between borrowers and traditional financial institutions that give credit services. P2P lending platforms operate as an avenue or means where individuals who have money to lend (lenders) and individuals or businesses who need to borrow money are linked and a deal is made. In this deal, the borrower can bypass several hurdles like collaterals and credit score which can prevent them from getting loans from a traditional bank or financial institution.

The peer-to-peer lending scheme is considered beneficial to all parties involved as the lender stands to gain more profit from higher interest rates, the platform gets a certain incentive and the borrower gets the needed cash with ease. This scheme seems quite easy and efficient as the main aim is to eliminate every barrier posed by traditional banks by offering the same services with fewer requirements. In all, best P2P lending brings together potential investors who become lenders and link them up with borrowers who get to pay back the initial money borrowed and additional interest which serves as an extra income to the lender/investor. Peer-to-peer lending bridges the gap in loan accessibility created by financial institutions which prevent individuals in need of loans from getting one.

How does P2P investing work?

The inner ropes or how the P2P schemes work are a little different from how traditional financial institutions operate although the common goal is to give loans and make extra money from interest rates.

The first thing one should know is that most P2P loan providers are online platforms. It is very rare to see physical outlets of P2P lending schemes although they exist. The reason most P2P schemes exist in the virtual space is that it is easier to pair lenders and borrowers online based on how perfect their preferences match. Also, the borrowers’ credibility is best ascertained online through monitoring the individual's activities on social media, app usage patterns, and several other means that can help determine the financial behaviour of the individual.

On P2P lending sites, if an individual chooses to be an investor, the very first step is to sign up as an investor. Being an investor requires the individual to deposit an amount of money which varies as each platform stipulates its own rules. You can filling out some documents which further prove your ability to be an investor. These documents are legally binding as P2P schemes are regulated by the appropriate governmental bodies which vary with countries.

As for the borrowers, individuals who intend to use the services of P2P schemes, are equally required to register on the platform. The capacity of the potential borrowers to pay back is not often ascertained by the individual's traditional credit score but by other means which can include social media activities, current jobs, and credit history, and other options which are available and peculiar to the website or platform. For example, after creating your account and portfolio on Robo.cash, you will earn an interest rate of 12% of the amount invested in a period of 365 days. With a P2P lending investment of €100 000, you will realise €112 000 which accounts for €12 000 interest in one year.

The platform which acts as the middleman is run by investment specialists and financial experts.

Would you like to learn more about P2P-investments? Watch our video:

Two types of P2P platforms

1. The first type of P2P platform is the regular type which acts as a middleman and connects investors to the borrowers.

In this type of P2P scheme, the investor bears the risks in case of default in payment by the borrower but all things being equal, in this type of scheme, the work of the platform is to link lenders with borrowers, draw up legal and official documents for both parties to sign then oversee the deal to the last detail which is the borrower paying back and the investor getting their income. After this, the platform collects a certain percentage, and that finally ends things between the parties involved.

2. The second type of P2P scheme is the one where investors contact an agency that is solely into the lending business.

Here, the organization pulls its capital from a group of investors and loans out the money to credible individuals after which they also take a certain percentage of the profit.

Without mincing words, the major P2P lending risk is the inability of the borrowers to pay back. However, for verified platforms, there are efficient ways of handling these situations if they occur. Most of the popular platforms offer so-called Buyback Guarantee. It implies that if the borrower doesn’t pay back on time, after a certain period, usually 30 to 60 days, the company that had issued the loan returns the money to investors and goes on to deal with the borrower on its own. One of the ways this is done is issuing a legal notice to the borrower indicating the implications of their actions and the likely consequences it brings. In some cases, the lending companies, or loan originators, can be empowered to block all financial activities of the borrower like blocking credit cards, freezing bank accounts, etc. In extreme cases, relatives and friends of the borrower can be contacted and involved with the whole issue.

Despite all these methods, there is no guarantee that the lender or investor's money will be returned whether in full or in part. This is why most times, the loans given in P2P schemes are referred to as insecure because once the borrower defaults, the capacity to enforce certain measures to correct this is often absent. However, this does not mean that P2P schemes are not good ventures to try out as an investor. It is absolutely a good opportunity for investment as the inability of borrowers to pay back should be seen as the risk of investing in P2P lending. 

Who can invest via P2P lending platforms?

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It is also important to note that there are no particular specifications for the class of individuals who can be investors on P2P platforms. Once one can abide by the rules that govern each platform, it is quite easy to become an investor. Investing in P2P lending requires investors to deposit a stipulated amount of money and declare that they won't pull out the money for a certain period. This means that the interest accrued for lending the money or the money itself would not serve the purpose of emergency funds.  Also, the time frame of a loan varies and many factors are responsible for this. First, the time frame to pay back a loan can be between several days to several years. This largely depends on legislation by authorities that regulate P2P schemes and the online platforms that also modify them a bit to suit their customers.

Another factor that determines the ability of an individual to invest in a P2P scheme is the interest rate. Usually, the interest rate of loans is higher than that of traditional banks which are often around 4%. The loans which are given out on these platforms allow a higher interest rate which means extra money for the investor. The purpose for P2P investing also determines who is eligible to invest in it.

For instance, if I am investing to pay off my school fees and student loans, investing my money in P2P lending might not be a bad idea if I am paired with borrowers that can pay back within a short period at higher interest rates, but it's going to be a terrible idea if the loan is given to a borrower that needs a longer period to pay back. In all, the factors one must consider before going into P2P lending investment are: flexibility and suitability of the available platforms, duration of investment, amount of returns on investment, and purpose of investment. With these put into careful consideration, one can make better and informed choices.

The best P2P investment platforms in Europe in 2022

P2P lending platforms have become one of the online investment options available nowadays with high returns. Let’s look at the best P2P lending platforms.

Table of the the most popular P2P platforms in Europe

Advantages of peer-to-peer investing

One cannot ignore the P2P lending advantages and disadvantages. For investors, venturing into peer-to-peer lending is not the wrong option.

This is because the peer-to-peer lending scheme has several advantages and they are as follows.

1. Higher interest rates. A big pro on the P2P lending is that investors stand to gain a higher return from the loans than traditional banks. For instance, an investor can generate a 12% interest rate which is significant compared to what such an individual would earn if the money was invested in a savings account, whether the traditional type or high yield savings account or even a certificate of deposit. In terms of interest rates, the peer-to-peer lending schemes have a higher interest rate and this is a significant advantage.
2. Easy access. Another significant advantage of P2P lending is that it is easy to become an investor. Being an investor entails signing up with the best P2P lending site considered to be the most suitable to one's preference. Also, one does not have to own much before becoming an investor as special platforms allow investments of as low as €1. This is in direct contrast to the rigorous process of opening a savings account, a high yield savings account, or getting a certificate of deposit. Again, the virtual nature of P2P lending makes it accessible from anywhere as long as an internet connection is available.
3. Easy operation. The P2P schemes also guarantee ease of operation for investors. With that feature, an investor does not have to possess much financial certification.  This is because the platform provides experts who are in charge of pairing lenders to borrowers and ascertaining borrowers’ integrity. In case of default in payment by the borrower, the duty of going after the offender lies with the platform and loan originators and this makes the whole experience easy for the investor. In the long run, you discover that the only duty of an investor is to make money available and just sit back and watch others do the remaining.
4. Diversity and control. As against the thoughts of many, the peer-to-peer scheme gives an investor diversity of portfolio. It serves as a perfect alternative option to invest in. In P2P lending investment, the investor has the power to disagree with certain conditions. For instance, if the platform pairs you with a borrower who wants a longer time to pay, the investor has the power to disagree and withdraw on deals that are not favourable. Although this does not apply in all cases. However, a certain amount of control over the directions of investment is granted to the investor.

Disadvantages of peer-to-peer investing

No investment is without risks and peer-to-peer investment is not an exception. Here are P2P lending risks or cons of investing in P2P lending.

1. Unsecured loans. As earlier stated, there are two types of P2P schemes, the first one solely acts as a middleman in issuing unsecured loans. This means that if the borrower does not pay back, the loss is borne by the investor alone and no form of backup or insurance applies here. The second type of P2P scheme gives a secured loan which means the investors’ money is insured. This however does not fully cover the risk that comes if the borrower defaults. In plain words, investment in P2P lending is solely at the investor's risk as he alone bears the benefits as well as the losses.
2. Delay in payment. Another risk associated with P2P investment is that the borrowers can delay in payment which might not always be convenient for the investor. Quick payment also can be a disadvantage as quick payment means less interest rate which in some cases can mean less yield for the investor. Again, in the case of the second type of P2P scheme, the company in charge of pulling investors together might run into liquidity and as such delay in payment of the investors.
3. Unavailability of internet connection. Since P2P investments are mostly online, any investor with poor or no network connectivity will be unable to access opportunities. Hence unavailability of an internet connection can be detrimental for the investor.
4. Absence of buyback option. The buyback option is a risk management scheme in P2P investing. This option allows the company/platform to pay back the investors their initial capital with or without interest. Where there is no buyback option, the investors might lose everything if the borrower doesn’t pay back. This can be the main drawback of the P2P investment option.

How to choose a good P2P investment platform

You can compare P2P lending companies and platforms to know the best peer-to-peer lending rates to choose from.

The tips to consider to choose the best P2P lending site include the following:

• Reviews. It is very unwise to rely solely on individual knowledge when choosing a P2P platform. It is also essential to check for the company’s reviews from experts as they possess greater experience in the field.
• Experience. Another important tip to look out for when choosing a P2P lending platform as an investor is the wealth of experience a platform possesses. If a platform has existed for a long period, it normally means that they are highly skilled to have remained afloat for long hence it is trustworthy. This does not discredit new or young platforms but older platforms are generally better to invest with as they guarantee stability.
• Buyback options. A buyback option is a form of risk security for investors. If a borrower defaults or delays in payment, this option allows the P2P platform to pay the investor back which makes up for the loss. Although in some cases the payment does not include the interest, it is still better to get the initial amount than nothing at all. As risk security is very essential, it is always best to go with platforms that give the buyback option.
• High liquidity status. High liquidity simply translates to the company's ability to pay back its investors in case of a loss. This means that the company generates more money than it gives out making it capable of sponsoring any losses. Low liquidity is a bad indicator hence should be highly avoided by investors.
• Terms and conditions. A potential investors should look out for investment platforms with the most suitable terms and conditions. More often, the services of an expert are required to explain in clear terms the contents of the terms and conditions of the agreement. It is important that the investor fully understands this before signing up on any platform. So, one great tip for investors is to read terms and conditions.
• Favourable currencies. A final tip for potential investors is to deal with favourable currencies. It is possible as an investor, you might want to do business with foreign companies. This is a good option but it can go sideways very quickly especially if the currency in use is very volatile. Hence, it is always advisable to choose stronger and stable currencies when investing.

P2P investing – is it safe?

It cannot be conclusively said that P2P investment is very risky or free of risks, however, it is important to note that just like other investment options, investing in P2P lending has its risks and the risk management mechanisms are lesser compared to what is obtainable in traditional banks. Irrespective of this, P2P investment is a decent investment option. It is even safer with the right platforms with the right risk security mechanisms. The P2P investment is low-risk and yields a higher return if the right actions are carefully taken in choosing the peer-to-peer lending companies. Your P2P investment is safer in the hand of a platform with good experience, good reviews, buyback options, and high liquidity status.

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Conclusion

In conclusion, P2P lending investment has its advantages and risks. But, with your investment in the best P2P platform, your investment will be safe and yield a higher return. For instance, Robo.cash has a buyback option and the experience required in the industry.


Read also:
Plataforma P2P en España

* The information in this article is intended for educational and entertainment purposes only and cannot be considered investment advice.