What is peer-to-peer lending anyway? Before we go over our services, it may be time to take that step back and answer the question from a few perspectives to ensure that there is clarity and that a variety of answers about P2P lending are understood. We start with an exploration of the response from the two most common perspectives:
Peer-to-Peer Lending: Perspectives
Here are the two main perspectives on peer-to-peer lending:
Peer-to-peer lending investors
Let’s start by answering the question, “What is peer-to-peer lending?” from the perspectives of the investor and the person looking for a loan. For the investor, the answer is that peer-to-peer lending is a way to broaden an investment portfolio and potentially make a greater return than other investment possibilities. There can be a good feeling attached to providing people with the money they need for a particular project or financial needs, knowing that they may face higher rates or more difficult terms with more traditional methods of getting personal loans.
The bottom line answer to the question “What is peer-to-peer lending” for the investor is that it provides a steady and proven return that can round out the investment portfolio for someone with extra income or savings.
P2P lending applicants
Regarding the person receiving a peer-to-peer loan, the answer to our question is that it provides a way to get needed money for a rate and under terms that may be more favorable than other choices. In some cases, other choices are not even available. And for the receiver, there can also be a good feeling that a peer is providing the funding. One way or another, the person receiving P2P lending has analyzed their options and found that there is no comparable option or the peer-to-peer lending option is the best one. They may have looked into rates, terms, and flexibility. Perhaps when they narrow the field to two options, they decide on a P2P loan because of the good feeling that a peer is interested in helping.
What is P2P Lenidng: Overall
Perhaps those who ask “what is peer-to-peer lending are looking for the overall, general answer. This is sometimes called an “elevator speech” or “elevator pitch” to denote the fact that you must be clear and concise with your answer or statement. So here is what we suggest are several answers to the question “what is peer-to-peer lending”:
1. Peer-to-peer lending involves matching individual community investors with other community members who need to finance a project or purpose”. This is perhaps the most clear and concise answer, and it would suffice to get someone to look into the details no matter what side they are on.
2. Peer-to-peer lending involves matching members of the community who are looking to improve their existing return on their investment portfolio with people who want to fund a specific project, such as starting a small business or purpose, such as credit consolidation. These extra details can help provide even more context.
3. Peer-to-peer lending cuts out the traditional middleman in the lending process. Instead of a bank holding money from individuals and lending it to others with interest, peer-to-peer lending involves people directly lending to others.
Peer-to-peer Lending Risks
Peer to peer lending risks exist for both the borrower and the lender. Of course, they are most pronounced for the lender, where the most significant risk of peer-to-peer lending is the possibility that the borrower will default. No matter which side you are on, it is vital that you are aware of the risks of peer-to-peer lending and you compare them with what you would face with a more traditional loan.
P2P Lending Risks for the Investor
Of course, the most obvious risk of peer-to-peer lending if you are an investor is that the person borrowing the money will default. You can often minimize this risk by spreading your investments out over a larger group – giving a smaller amount to many people. You can also cut your risk by choosing who to lend to carefully – most peer-to-peer lending sites give you substantial information such as credit scores, home ownership, years of work, years at current job, amount of revolving credit, etc. Keep in mind, however, that as you cut the risk of any individual investment by narrowing your choices, you will likely receive a lower return—interest rates, at least to some degree, factor in risk.
Other risks
Other peer-to-peer lending risks may not be so obvious, including the risk that you need your money right away, but with this type of investing, you have to wait until it is paid off. While not technically a “risk,” you may find that other investment opportunities become available while your money is tied up in P2P loans. One final risk of peer-to-peer lending is that you may lose out on tax advantages you would find with different types of investments.
Peer-to-Peer Lending Risks for the Borrower
There are peer-to-peer lending risks to the borrower if you choose a large and established site for your loan. In most cases, the investors have already committed the total amount of your loan by the time you pay anything back, so you do not have to worry about a lender default. Also, given the widespread acceptance of peer-to-peer loans, even potential changes in regulations and laws should not affect your loan. The main peer-to-peer lending risks, then, are your own: The risk of not being able to pay the loan back within the terms that it was lent to you, the possibility that the interest rate will be too high after your characteristics are figured in, or the chances that whatever project or purpose you have borrowed the money for will not go through.
Non-platform investments
Of course, the above assumes that you are using an established platform, and there are peer-to-peer lending risks for the borrower if you do not – risks that the site will not stay in business or that something will get confused along the way. If you received all of your loans upfront, this may not be too much of an issue, but if you receive the loan in some installments, that could be a different story.
ReducPeer-to-PeerPeer Lending Risks
There are three easy ways for both the investor and the borrower to reduce the risks of peer-to-peer lending:
Do your homework about your partner
Of course, this is much easier for the lender, who can pick and choose who to lend to using various filters. As a lender, make sure you know which ones are important to you, and remember that if you are too picky, you may not get as high a return on your investment – safer investments will come at lower rates. Most of the time, even with defaults factored in, you will do better, taking at least some risk. The way for borrowers to do that homework is to look into the site itself and make sure that loans do, in fact, get funded for people with your history. Your only real risk is that you cannot do your project without funding.
Do your homework about the peer-to-peer lending website and platform.
Is it easy to use? Does it have good customer service? Do loans get funded? For investors, choosing the right platform can be as big as choosing who to lend to. You will have at least a three and often five or longer year relationship with that website, and you want to be sure it’s a good fit, and you will get the service you need. Look for independent reviews online, and make sure they are truly independent – for example, while affiliate links are okay if a site has many of them to many platforms (and therefore does not care which one you choose), they are not okay, or at least no unbiased, if they seem to favor just one site.
Do your homework about P2P lending alternatives.
Make sure you have scouted out other options for borrowing or investing. Peer-to-peer peer lending is not for everyone. For example, as an investor, you only get your payoff gradually – you do not get all your principal back with interest until the entire loan length has passed. As a borrower y, you may get a favorable rate and a much shorter term s, so you need to be sure you can pay things off that quickly. Even if peer-to-peer lending is outstanding, compare it to your other options first.
P2P Lending Conclusions and Our Work
As you can see, the peer-to-peer lending risks are not pronounced in most cases, and the central one lies on the lender side and is related to defaults. Careful research and homework by both sides before the loan is originated can mitigate many of the risks listed above, and if the lender spreads their investments out among many different investments and the borrower does their homework about where to borrow from, the chances of occurrence of any of these peer to peer lending risks will drop.
Peer-to-peer lending returns are reasonably easy to assess, but there can be complexity when it comes to when you can get your money back out. This post goes over peer-to-peer lending returns with a focus on the returns and the complexity involved in getting your money out.
We’re here to help! Whether you are an investor or an applicant in P2P lending, we can help connect you and help you find success. Contact us any time.
