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Peer-to-peer (or P2P) lending is emerging as one of the major industries in the FinTech sector with the creation of billions of dollars of loans every year. P2P is the practice of lending money to individuals or businesses through an online platform.
As an alternative to traditional financing, a FinTech company creates a system that matches loan applicants directly with investors without the need for an intermediary. The investors sign up to the platform to fund the loan as individuals, private companies, or financial institutions and can invest in a variety of loans to spread their risk.
Peer-to-peer lending, often referred to as crowdfunding, marketplace lending, alternative lending, and social lending, is a type of financing that connects people or entities willing to loan money with people or businesses that want to borrow money. Each platform sets the rates and the terms (sometimes with investor input) and enables the transaction.
The lending model is categorized into three types:
- Consumer lending: small personal loans for buying vehicles, for weddings, home renovations, etc.
- Small lending loans: for small businesses that need working capital, business expansion, and asset finance.
- Property loans: personal mortgages, residential renovations, and developing commercial loans.
P2P lending investment
P2P lending can potentially help investors earn extra income and diversify their portfolios. P2P investors may obtain a higher return compared to what they would gain in a high-yield savings account or other investments.
Becoming a P2P investor begins with opening an account on a P2P lending platform. The money you deposit will be loaned out through the platform to qualified borrowers. You can review loan requests and choose the applications you would like to approve, either providing the full loan amount or a portion of it. You can also track your earnings from principal and interest as your borrowers make their payments.
Potential risks in P2P lending
Keep in mind that there is risk involved, as with any investment. First, there is no guarantee your borrowers will repay as promised, and there is also a potential hazard that the lending platform itself could shut down. In either case, you might lose a substantial portion of your investment, especially if the loan you financed was unsecured. Research the security arrangements the platform has in place before investing.
However, while a P2P loan may be suitable for borrowers who would prefer to explore alternative financing sources because they may not qualify with conventional lenders, the P2P loan process is not that much different from the traditional one. The most creditworthy applicants will typically qualify for the lowest rates and best terms in the system, making it an interesting choice for investment.
Best lending platforms for investors, corporations, and startups in FinTech
P2P has disrupted the financial sector and emerged as a competitor to the traditional banking model: lenders receive higher returns when compared to savings and the borrowers can borrow money at lower interest rates.
The best p2p lending platforms offer multiple types of loans and have competitive interest rates and low fees. They have varying minimum and maximum loan amounts and lend money for a variety of different reasons. The best sites have a streamlined application process and highlight their borrower qualifications upfront. Some of the best platforms are:
- Peerform: extensive industry experience in operation since 2010
- Upstart: boasts a low delinquency rate among borrowers
- Prosper: minimum investment of US$25
- Funding Circle: a little more conservative for borrowers
Benefits of P2P to investors
There are many benefits to becoming an investor in P2P lending:
- Higher returns: P2P lending offers higher returns to investors as compared to traditional lending methods. The risk factor plays a key role: the higher the risk, the higher the returns.
- Opportunity for diversification: investing in consumer credit offers investors an opportunity to diversify their portfolio much more than compared to other investments.
- Simple to understand: for individual investors, P2P lending is easier and simpler to understand than most other investments, such as bonds or stocks.
- Opportunity to perform better: A lot of investors opt for this type of lending as it gives them an opportunity to provide help to small businesses and entrepreneurs.
One way to enter the world of P2P investing is through the Finnovating platform, which can help you connect with all types of investment opportunities by bringing you directly into the FinTech ecosystem.
The Discovery tool is designed to connect you to the world’s largest FinTech database of startups, corporations, and investors with over 50,000 opportunities for collaboration between corporations, FinTech, and investors.