You have probably heard about P2P or peer-to-peer borrowing and lending, but you do not know how it functions. Generally, it is a combination of lending firmswith billigste lån that match businesses and people looking to borrow money. The companies make a profit by charging transaction fees to both sides.
P2P lending websites state that cutting banks from the process allows them to create a more competitive ROI. As a result, borrowers tend to pay less interest than other loans from traditional lending institutions.
How Does It Work for Investors?
Since the savings rate increased significantly in the last few years, both investors and savers want to find alternative ways to earn higher interest on their money. That created a significant rise of P2P websites on the market and people investing in them.
Therefore, if you wish to become a P2P investor, you must open an account on a platform or website and transfer the amount you want to invest. You can find numerous P2P companies available on the market, which is one of the advantages of the entire process.
It would be best if you considered these factors before investing:
- The Amount You Wish to Invest – The minimum is approximately a thousand dollars, meaning you should prepare for the entire process.
- Interest Rate You Wish to Receive – You should know that higher interest rates will increase the risks of losing your money, so you should think about each step along the way.
- How Long You Wish to Lend Money – You can choose to lend money for a few years or less.
The main idea is to split the amount you invested between various borrowers, which will reduce the chance of losing money if someone defaults or cannot keep up with payments.
How Much Can Investors Earn?
You can earn between two and six percent using this particular investment option. Still, everything depends on how long you wish to lock your funds and who you want to lend the money to. For instance, you can choose a higher interest rate for longer options, but you will take more risks.
The interest rates are one percent on conventional savings accounts, while a few will pay you 1.5%. The defaulting risk will be higher, and the interest rate. On the other hand, P2P returns depend on the creditworthiness of borrowers, meaning you can lend businesses and individuals with a lower rating.
The rate of interest features a target return, meaning you can earn less. It would help if you reduced the interest rates accordingly. Of course, you can lend options with less risk, meaning choosing borrowers who are less likely to default. Therefore, you should think about each step along the way before making up your mind.
Understand Potential Risks
Suppose you wish to use the P2P platform. You should avoid thinking of it as a savings account. In that case, you should understand that you will invest money and not protect it by placing it on secure deposit. Therefore, risks will increase, but you can earn more money than other options.
We recommend you to be aware of the following factors:
- No Safety Net – Having a savings account means the federal government will protect your money depending on your financial institution. However, the P2P lending platform does not come with the same coverage. Therefore, if a borrower defaults on the loan, you cannot get the protection you need. However, platforms come with protection schemes to provide funds that will pay out if the borrower misses a payment. Methods vary between various platforms, which is something you should check before making up your mind.
- Lending Site Can Fall– In some cases, P2P companies can go out of business, as it happened in the past, meaning you will lose the invested amount. Of course, federal associations regulate them, meaning you can receive peace of mind. But it is not as simple as it seems. For instance, when Lendy, a P2P company, collapsed, investors lost approximately fifty million euros. The funds did not come with ring-fences as investors thought at first.
- You Cannot Get Money in Short Run –You can lock money using a fixed term, meaning you cannot withdraw the funds until the term is finished. If you do it, they will charge you a fee. In most cases, existing loans will match with other investors before withdrawing, meaning it can take a few days and even weeks. Therefore, you should keep sufficient funds for instant access to prevent surprise expenditures.
How Does It Work for Borrowers?
Another way to use the P2P option is to borrow funds depending on your needs and preferences. The best thing about it is the lower interest rates than other traditional lending institutions. Still, your payment amount depends on numerous factors, such as your credit rating and history.
Both businesses and individuals can apply for a loan by using P2P. Therefore, investors will determine whether you are creditworthy to repay the amount. In contrast, people with a low score will get higher interest rates than those with perfect credit scores.
If you wish to do it, we recommend you register your account on the website and select the amount you wish to borrow and the term. You should enter additional values, including the terms and interest rates.
When you borrow over the long term, you will reduce the size of monthly installments. However, you will make them longer, meaning you will pay higher amounts than the one you have taken.
Advantages of Borrowing with P2P Platforms
- It is a more affordable option than traditional loans
- You can use it in case you cannot get the regular loan from a bank due to a lousy credit score
- You can rest assured because you will not get early repayment fees in case you decide to repay everything before the time
- You will take advantage of unsecured loans, meaning you do not have to use assets such as a car or home as a collateral
Remember that arranging a loan may come with a fee you must pay to a platform that will act as a safety between you and the investor.