Peer-to-peer lending is growing in popularity. A lot of consumers prefer personal loans instead of a bank loan, and financing consumer lending can be quite profitable. How can you finance p2p loans? And wat are the pros, cons and possible risks when you lend money?
There are numerous reasons why p2p-lending is immensely popular in some areas. Especially in countries with a high interest rate it is a common way of funding nowadays. In Europe, the volume of these p2p loans is growing fast.
Even though the interest rates of peer-to-peer loans can be pretty high, for lenders it might still be easier than going to the bank for a consumer loan. Additionally, lending money from other consumers on a p2p-platform is usually faster and sometimes even cheaper.
What is peer-to-peer lending?
P2p-lending means a loan that is funded by other consumers. For example to buy a car, for home improvement or to purchase solar panels. Mostly, banks aren’t interested in small loans, but for small investors it can be a good investment. The idea of p2p lending is that both borrowers and investors are getting better conditions than at a financial institution.
Europe has many p2p-platforms.
There are many lending platforms in Europe that provide p2p-lendings. Because they use modern techniques to assess applications and calculate the credit score of borrowers, the overhead expenses are lower than at the bank. To protect investors, most platforms will check the lenders’ credit risk thoroughly. Besides that, the interest rate can be over ten percent. To compare, there are banks that charge money for your savings account.
What are the pros of p2p-lendings?
There are good reasons to invest in peer-to-peer lendings. Firstly, financing loans on lending websites such as Mintos or Bondora that match lenders and investors, can generate returns of ten percent and more. Of course, lower returns occur and some borrowers may have trouble paying. But when you have a good diversity and some time, you can quite easily make money with the right investment opportunities.
Also, the investment can be done at an easy to use online platform. If you don’t want to spend a lot of time on research, you can even automate your investments. Furthermore, it is not necessary to lend a lot of money. At some platforms you can start financing your first loan from as little as one euro.
Wat are the cons and risks of p2p-websites?
Like any other form of investment, p2p-lending involves risks. The main risk is that lenders aren’t able to pay you back all of the loan repayments. In that case you could lose (a part of) your investments. In this context you could include buyback guarantees in your consideration.
When the consumer is having financial problems, the platform will buy the loan. In general you won’t get the coming interest, but at least it limits your loss. Not all platforms or loans have a buyback guarantee. Another way to minimalise the risk is to only invest in consumers with good credit ratings.
P2P-platforms could go bankrupt.
Not only the consumer can get in trouble, also the platform could go bankrupt. Luckily it doesn’t happen often, but there are p2p-platforms that don’t excist anymore.
What is the return rate of consumer loans?
The return rates can be high, but it is not necessarily like that. It depends on what kind of risk category you are investing in. In general, you will have a return of three to five percent in the lowest category. In the highest category, returns of more than ten percent are no exception.
But it also depends on the platform. Do not forget that most platforms charge a (small) fee for their brokerage.
Despite of the high returns, investing in peer-to-peer lendings is not the best way of making a lot of money in a small period of time. To get an interesting return, you will have to invest in consumer loans for at least a couple of years.