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What You Need To Know About Peer To Peer Lending

Reading Time: 5 minutes

 

Some people are just born with an ability to tolerate high levels of risk. It is not surprising that they are also the type of people who end up very wealthy.

This is not to exclude you if you are naturally cautious. Of course, with the right information, you just might find taking a little risk isn’t too bad.

But what are we on about, you may be wondering?

It’s called peer to peer lending, an excellent way to grow money and is quickly gaining popularity in recent years.

Let’s find out more!

 

What is Peer to peer lending?

Also known as p2p lending, peer to peer lending is a method of financing debt without going through the usual financial institution’s route. Borrowers are matched with lenders through an online platform that cuts out the middleman.

In its basic form, p2p lending is really that simple. From an investors or lenders point of view, you can earn interest on the money you invest. Borrowers can also easily access funds to finance their debts.

Let’s break it down some more shall we?

There are two main players in peer to peer lending—borrowers and lenders. The platform will display the borrowers based on their risk profile.

Lenders can then pick exactly who they want to send their money to.

There is no part played by the lender in collecting the funds from the borrowers. The system simply does this and sends it to the investor’s account.

It is the lender who will be acting as the financial institution in this case.

The borrower will decide whether he wants to agree on a loan at a specified interest rate by the lender. The lengthy process of screening loan applications that is common with banks and other financial institutions is simply taken out of the equation.

But what if a lender has ideal interest rates but cannot provide the borrower with all the money he requires?

Well, the borrower can take many smaller loans from different lenders. During repayment, the borrower will have to settle all the accounts.


How to Secure p2p Loans

Traditional methods of borrowing loans often require the borrower to give something in return as collateral in case he defaults.

Peer to peer lending is a form of unsecured debt financing. Granted, this is risky for the lender, but the benefit is that the investor can fan out his amount to different borrowers thereby spreading his risk.

To secure loans, borrowers will need to make an application with a peer to peer lending company. These online platforms act as the intermediaries between the lenders and borrowers. They will then assess and analyze the creditworthiness of the applicant and provide them with an interest rate.

 

Why You Should Consider p2p lending?

It’s simple,  it gives a good solid return on investment, usually starts at 7% and goes as high as 36%. Just set up the automated investments feature and let the complicated algorithms make the decisions for you (obviously after you select all the parameters and filters).

 

Is p2p safe investment option?

Absolutely not! We have learned from a very good source that 6% to 10% of loans have defaulted every year. So if you are thinking about making money through p2p programs, it’s best to spread your portfolio. In other words, don’t lend all your money to a single borrower!

For example, if you are investing $2000, the best way would be to invest in smaller denominations and thereby, increasing the number of loans you give out.

Secondly, you can also diversify by giving loans at different rates. Loans are categorized based on their riskiness. A risky loan pays out more.


Top Peer to Peer lending Sites to Look Out For

Think of when you need a loan, so you go to a bank. The credit officer takes your application and crunches numbers as you wait for the final verdict.

This can be nerve-wracking especially if you are in serious, desperate need of cash. Let’s face it, it’s far much easier getting a loan from your friends or family.

This is the concept behind peer to peer lending and in 2005, the first platform, Prosper was set up. Since then, the idea of p2p lending has skyrocketed with a continued annual growth that shows no signs of slowing down.

1. Prosper

Set up in 2005, this platform is the pioneer to the concept of p2p lending. This US-based site has to date given out more than $2 billion helping people from all walks of life secure loans.

Prosper provides a maximum loan limit of $40,000. Their loans have a fixed term repayment of either 3 or 5 years. What’s more, the interest rate is fixed and will not change over the course of the repayment period.

Once a borrower makes an application, they will receive their rating and a successful loan application will see the funds deposited directly to their bank account.

As a lender, you stand to earn from the interest on the principal amount. You get to choose several loan categories based on their level of risk as follows:

  • AA—4.99%
  • A—5.22%
  • B—5.77%
  • C—7.78%
  • D—11.49%
  • E—13.48%
  • HR—11.74%

Ooh, HR stands for high risk by the way. It has the highest interest rate due to this very fact.

2. LendingClub

It is the second largest p2p lending site in the market. For borrowers, they can choose any of the 4 different options available to them. These are:

  • Personal loans- up to $40,000
  • Business loans- up to $300,000
  • Auto refinancing- $5000 to $50,000
  • Patient solutions- up to $50,000

To invest with LendingClub, you will have to deposit a minimum of $1,000 into your account but the great thing is you can start lending out as little as $25.

This platform is super easy to use for investors. If you don’t like the idea of picking loans manually, you can make use of their custom mix, or platform mix features to pick the loans out for you automatically.

What’s more, they have an education section which offers its users all the information they require to invest with them.

3. Peerform

This is one of those p2p programs where you don’t really need a stellar credit score to qualify, however, the base limit is set at 600 credit score. While Peerform willingly accepts people with a poor credit score, but on the other hand, interest rates charged are higher as compared to other platforms that are working in this space.

And one more really important thing, in order to get qualified, borrowers need to show that their debt-to-equity ratio is 40%.

From the investing point of view, not anyone can join their lending program and start giving out loans. For now, only accredited investors are accepted as lenders at Peerform. Investors can choose between two main type of loans; whole loans and fractional loans.

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