Hey, you! If you are interested in finance, especially Peer-to-Peer (P2P) or crowd-lending, you’re on the right path to discover exciting ways to make your money work for you better!
This article will teach you how to improve your financial well-being, and especially – how to handle your money as the banks do! You will learn crowd-lending, how it works, the types of peer-to-peer loans, pros & cons, diversification, interesting facts, and we’ve also crafted a list of our 17 BEST P2P lending platforms below. In our opinion, the best way to earn some money is to invest in all of these platforms! Diversification is probably the key to a successful investment. We will share more about diversification at the end and you will make your own decision. ?
So let’s go! Did you know that China’s peer-to-peer lending market has become the largest in the world? The rapid global expansion of online peer-to-peer lending has been driven by the supply of funds from retail investors and the demand for access to finance from individuals and small and micro-business owners. That’s great news, right?
Let’s now dive into all the details of peer-to-peer lending and learn how to use it to catapult you towards financial independence!
What is peer-to-peer (P2P) lending?
Peer-to-peer lending is a form of debt financing that allows individuals to borrow and lend money from each other – no banks involved. This sort of alternative business funding has existed since around 2005 and is becoming increasingly popular. It offers borrowers many advantages over traditional loans – e.g. you can make the crowd believe in your farm loans (with your tractor as the collateral) will return the peer-to-peer loans when harvesting comes. Or you can return the loan as a property developer who sells the newly built property in Tallinn, Estonia, or in London, with the last being collateral for the loan.
Typical peer-to-peer lending allows borrowers and lenders to connect through online marketplaces (crowdfunded loan platforms) acting as a match-maker to facilitate the loan/investment. They are regulated to make sure there is protection for the lender. Both the borrowers and lenders agree on the terms for repayment, depending on the types of peer-to-peer loans.
Peer-to-peer loan sizes tend to be between £500 and £4,000 for unsecured P2P loans and £5,000 to £500,000 for secured deals.
How does P2P lending work?
Peer-to-peer providers link borrowers directly with investors via an online platform or website offering different interest rates and loan types.
Investors: Investors open a lender account and deposit a sum of money for lending/investing purposes. Some P2P platforms offer the investor to divide this into smaller sums into many different loans inside. This is a great way to diversify and you would be safer investing across multiple proposals.
Borrowers: The P2P platform assigns the borrower a risk category, which then dictates how much interest they must pay on the loan. Sometimes investors can negotiate with potential borrowers, the process is fully automated.
Types of Peer-to-Peer loans
The loan options available have expanded in recent years as the number of peer-to-peer lending platforms has grown.
Personal loans ?
These kinds of loans are the most frequent type of loan offered by peer-to-peer lending websites. Flexibility is a major reason for this. Traditional financial institutions (the banks) have more limitations on loan funds than peer-to-peer lenders. Another consideration is credit quality. While banks tend to lend only to people with good credit scores, peer-to-peer platforms will commonly lend to people with fair credit.
Interest rates start in the mid-single digits, which is far cheaper than credit card rates. Peer-to-peer platforms, unlike traditional banks, offer fixed-rate loans. To take advantage, it could be possible to pay off your debt faster than if you used separate revolving lines of credit to plan payoff schemes.
Car loans ?
On peer-to-peer sites, auto loans are an unofficial loan type. You can borrow funds to buy or refinance a car, and it might not be a car loan. Although the rates offered on car loans (or more specifically, personal loans) may be higher than those offered by banks, peer-to-peer sites have one advantage that bank auto loans do not: The loans will not be secured by your vehicle. This could also be a significant benefit because you almost certainly use your car to make money – either to commute to work or to run your business – it’s preferable to own it debt-free.
Business loans ?
P2P lending is rapidly making a positive impact on the business loan market. That’s also a good thing. While hundreds of banks advertise business loans, they typically have strict lending criteria, require massive amounts of documentation, and do not make nearly as many loans as they claim.
Peer-to-peer lenders, on the other hand, provide all of the same benefits to businesses as they do to other types of loans. Low to mid interest rates, a simple application process, short response time, and greater credit flexibility are all part of the service.
If you own a small business, getting a business loan from a financial institution might be impossible. Banks typically lend to large business organisations, such as well-established publicly traded companies. If you own a small, independent business, you are unlikely to get such great terms as the big corporations. As a result, demand for peer-to-peer business loans is expected to grow steadily in the future.
Mortgages and re-financing ?
Mortgage lending is extremely competitive, and peer-to-peer sites’ pricing and terms are not yet as aggressive as the industry standard. However, because P2P is a relatively new opportunity, everything is still picking up speed. If mortgage lending progresses in the same way that other types of peer-originated loans on the web do, good things are on the way!
Student loans ?
Peer-to-peer lenders may be more important than any other loan originator when it comes to student loans or refinancing. While there are hundreds of sources for student loans, including traditional financial institutions and the government, finding lenders who will do a student loan refinance is difficult. One of the complications with student loan refinancing is that, while the original loans may not have required you to qualify properly. You’d be obligated to meet the criteria for both credit and income to refinance. That’s where peer-to-peer sites can outperform traditional lenders.
Medical loans ?
Medical financing, like student debt loans, is becoming increasingly important. As deductibles and co-payments rise, and certain treatments and procedures are no longer covered by traditional health insurance policies, the demand for medical financing grows.
Peer-to-peer sites offer medical financing to cover the growing list of expenses that health insurance might not cover.
How can P2P lending help your business?
You can use peer-to-peer business loans to support almost any business purpose by injecting a lump sum of working capital into your processes. This is repaid over a period of time that makes monthly payments affordable without risking cash flow.
The advantages are obvious, you as a borrower who’s receiving better conditions, faster, than you would through standard lenders. The peer-to-peer lending model is very transparent, less expensive, and an innovative option.
P2P uses both technology and traditional lending methods to come up with a unique solution for lenders and borrowers. A good example of how P2P lending can help your business is demonstrated by a British family who was rejected by many high street banks and turned to a UK P2P lending platform to fund their new farm shop.
“Barnowl” Farm Shop, set up on a Jersey dairy farm in Northamptonshire, is now a family-run farm shop that sells raw (unpasteurised) and pasteurised jersey milk, Jersey cream and ice cream made on the farm, seasonal fresh fruit, and locally handmade food goods. The owner of the “Barnowl” farm shop says that there is a high chance that this would not have happened without peer-to-peer lending!
Advantages of peer-to-peer lending
There are a ton of reasons why borrowers might benefit from taking the P2P lending route:
- Automated process: To better serve customers in the face of increasing competition, many peer-to-peer (P2P) lending platforms have launched automated investment tools. Furthermore, the use of automated investment has no effect on the overall return on investment (ROI). For the inexperienced P2P investor, artificial intelligence comes in handy here.
- Secondary markets: The secondary market is where investors can buy and sell loan components from and to other investors. The benefit of this type of trade is that it allows investors to liquidate their investments. Other advantages of trading on the secondary market include:
– Possibility of obtaining a return faster than the repayment schedule.
– Possibility of generating even higher returns if they are able to sell their investments at a higher price than the nominal price (premium price) or buy at a lower price than the nominal price (discount price).
– Possibility of investing in loans not available on the primary market.
- Higher returns to the investors: In general, P2P lending provides higher returns to investors than some other types of investments.
- Unsecured loans: Most P2P loans are unsecured as they’re based on the cash flow your business generates. This means you don’t have to give up any equity in your business or offer assets as security.
- Flexibility: You can only borrow as much as you need if you decide to set a specific loan amount. P2P platforms offer a variety of loan amounts and terms, and some do not have a minimum loan amount.
- Accessibility: It might be a good option if more traditional sources of capital, such as banks, are challenging to locate. This service provides access to thousands of lenders across all sectors.
Disadvantages of peer-to-peer lending
This type of borrowing isn’t suitable for every business, and there are downsides to be aware of:
- Charges and fees: If you miss payments or pay off your loan early, the platform may charge you a fee.
- Interest rates: P2P loan interest rates may be higher than those offered by the financial institution (bank) or building societies.
- Action taken for missed payments: If you fail to make your loan payments, the provider may assign the debt to a collection agency or take you to court. This could harm your credit score and result in penalty fees.
The impact of credit checks and reports: Credit checks performed by the platform using a credit reference agency will affect your credit report, though some use a minor credit check that does not.
Which are SAVI’s TOP 17 P2P lending platforms in 2022?
Are you looking for UK and EU’s best P2P lending platforms in 2022? Look no further!
We have reviewed over 50 different P2P lending platforms and here’s the list of our best 17!
The choice can sometimes be hard, but remember diversification!
| Name | Year launched | AVG. return | Min. investment | Loan Types | |
|---|---|---|---|---|---|
| 1 | PeerBerry | 2017 | 10.91% | €10 | short, long, leasing, real estate, and business loans |
| 2 | ReInvest24 | 2018 | 14.80% | €100 | real estate equity loans |
| 3 | EstateGuru | 2014 | 11.20% | €50 | short-term, property-backed loans |
| 4 | Bondster | 2017 | 13.90% | €5 | consumer and short-term loans, secured business loans |
| 5 | LenderMarket | 2019 | 13.80% | €10 | consumer and real estate-backed loans |
| 6 | Swaper | 2016 | 14.00% | €10 | unsecured consumer loans |
| 7 | Mintos | 2015 | 10.30% | €10 | agricultural loan, business loan, car loan, home equity loan, pawnbroking loan. |
| 8 | AXIA Funder | 2019 | 48.00% | £500 | real estate loan, consumer and business loans, development financing, and fine art. |
| 9 | NEO Finance | 2015 | 12.00% | €10 | development loans, personal loans, car loans, home repair loans |
| 10 | BulkEstate | 2016 | 14.20% | €50 | real estate loans |
| 11 | Nibble | 2020 | 14.50% | €100 | short term loans, installment loans. |
| 12 | Crowd Estate | 2014 | 14.49% | €100 | real estate loan, business loan, mortgage loan |
| 13 | Crowdestor | 2018 | 19.48% | €50 | business loans |
| 14 | FinBee | 2015 | 18.50% | €5 | small and medium-size business loans |
| 15 | Viventor | 2015 | 13.60% | €10 | consumer, business and invoice financing loans |
| 16 | FastInvest | 2015 | 13.98% | €1 | consumer loans |
| 17 | Funding Circle | 2010 | 7.00% | £100 | long term loans, business loans |
Diversification: Why you should diversify
Diversification is probably the best way to protect your investment. You don’t want to keep all your eggs in one basket because if it drops, you are done.
Diversifying your portfolio is time-consuming but well worth it in turbulent market times, a bear market or a market crash.
All you need to do is take the time to invest in many platforms and products or loan types inside.
Define your targets before you begin researching the P2P lending platforms that will help you diversify!
After that, see if your investments provide enough options for you to spread your funds. Also, consider the options you have to get out of your investment – to liquidate your portfolio and get the cashback in your bank account.
Secondary markets for P2P loans: Having access to your invested money if you need it earlier
When you lend money via P2P, you get your investment back at the end of the loan term.
For this reason, crowd-lending platforms are required by law to run “Secondary marketplaces” because keeping all of your money in one “basket” is often the simplest but not the safest option.
Secondary markets in peer-to-peer lending are in-platform marketplaces where you can buy and sell loans that have already been bankrolled. It is used by lenders to exit loans early. Investors use it to receive their investment money back by reselling or to begin lending immediately rather than waiting for new loans to be funded.
If you want to get out of a peer-to-peer loan but don’t want to wait for it to mature, your primary option is to use the secondary market in your platform of choice.
It is essential to understand that not all platforms provide secondary markets for loans. Check for these features before investing, especially if you know you may need to exit the loan earlier.
Terms usually are such that you get less money back when you need it. The discount is usually between 0% and 5%. Less-established platforms might provide no way to exit the investment early. This is why we gave you the list of our top 17 platforms.
How much do P2P investors earn?
With peer-to-peer lending, investors may expect to earn between 2% and 15%, depending on how long you are willing to lock money into loans and the type of loan. If you invest for a longer period and take on greater risk, a higher rate of interest could be expected.
Also, you’ll need to decide:
- How much do you want to invest – the minimum is often around £500 but some crowd-lending platforms allow you to invest smaller amounts.
- What rate of interest you’d like to receive – higher interest rates usually come with a higher risk of losing some or all of your money.
- How long are you comfortable locking your money for? – e.g. two months or two to five years.
In most cases, your investment will be spread among several different borrowers. This can help avoid losing a lot of money if one of your borrowers defaults or is unable to make payments (we feel we need to mention diversification once again).
P2P loan returns are based on the creditworthiness of the borrower, the collateral and the loan-to-value (LTV) ratio of a secured loan. So, if you’re happy to lend to individuals or businesses with lower credit ratings – where the risk of the borrowers defaulting is higher – the interest rate will be higher. The rate of interest will be lower if you decide to take on less risk and only lend to individuals and businesses who are less likely to default.
It’s important to note that the rate of interest displayed on a P2P platform is not guaranteed; rather, it’s their historic return, or it could be your ‘target’ return, but you might earn less in reality.
Do P2P investors pay tax?
As with any investment profits, interest income is taxed in any country just like interest earned from other securities such as profits from the stock market or in crypto.
The interest amount earned from P2P lending is classified as ‘Income from Other Sources.’ It is added to the lender’s income and taxed according to the lender’s tax bracket. So, if someone is in the 30% tax band, the interest they earn will be taxed at 30%.
How safe is peer-to-peer lending?
Peer-to-peer lending, like any loan, has risks, but it can be a safe method to get money if you don’t qualify for a bank loan. The good news is that the Financial Conduct Authority (FCA), the European Parliament and other worldwide regulatory agencies set rules to protect you – the investors or the borrower.
There is additional protection for borrowers as well if something goes wrong. Furthermore, most peer-to-peer lending platforms use strict verification and vetting procedures for both borrowers and lenders.
One of the advantages of peer-to-peer for lenders is that they may diversify risk by investing in a variety of loans. Lenders may diversify their risk by investing in a range of loans, which is one of the benefits of peer-to-peer lending. And of course, you can’t get this service from your bank.
Interesting facts about P2P Lending
P2P lending is a relatively new wonder of the modern world, but it is exploding due to the myriad of market possibilities and the potential to grow people’s savings.
Here are some fascinating facts about crowd-lending that might surprise you!
❗ Fact 1
Hundreds of millions of pounds of peer loans are issued every month!
If you think peer-to-peer lending is a novelty, think again. ?
❗ Fact 2
Borrowing from peers is 70% cheaper than credit cards! Over time, a small percentage difference in interest rate can have a big impact and you could be debt-free faster! ?
❗ Fact 3
Investing in P2P lending can be less risky and less volatile than the stock market, especially crypto! For example, the US Stock Market went down 53% during the financial crisis in 2008, and peer lending investors lost 3% over the same period! ?
❗ Fact 4
Popular P2P loans are fully funded within 30 seconds! New loans are made available to investors multiple times every day, but there is so much competition for the greatest return so they quickly disappear! At SAVI, we’re solving this and much more for you. ?
❗ Fact 5
It’s okay when loans are defaulting if you diversified your investment! When investors add more loans, returns quickly converge towards the average. Since each loan may be funded with as little as £25 or with a few thousand pounds, it is reasonable to invest in a sufficient number of loans to significantly limit the danger of ever losing money. If one loan goes bad in your portfolio, you get 10.76% instead of an 11.23% return. ?
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Once again, diversification is the most neutral strategy you can use, you can learn more about it here or start diversifying on all those platforms above. Creating an account is easy, but going through all the options you have takes time. Would you take the time and take your savings into your hands?
Join the SAVI community and be the first to know how to optimise your money and become the CEO of your life!
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