P2P lending which is also known as peer to peer lending is a type of passive investment that involves a group of investors coming together with the aim of helping the borrower raise some cash for a fee, usually their return for lending. P2P lending emerged over a decade ago and has grown by leaps and bounds since then. During its first years, the lending was 100% fractional but by the year 2013, it evolved by encompassing ‘the whole lending’ into the fold. At lower rates on interests, borrows can make more return thus more investments and savings which is far much better than normal banks selling the same services. The peer to peer lending provides the customer with credit checking to be able to match with normal banks.
Peer to peer lending is also known as crowd-lending. This is because the personal loans are unsecured. For businesses, however, they lend large amounts. Fine arts, buildings, watches, jewelry, and cars are among the business assets that sometimes secured loans are offered by. Students loans, payday loans, loans for businesses, real estate’s loans and leasing loans among others are more peer to peer lending that is made.
There is always competition for the lowest rates, but sometimes companies that are intermediary can set fixed rates. The fixed rates are always given by the borrower. The government does not guarantee protection for the loan given by the lender; there is always a risk of debts on some of these services. The lender can distribute their investments among different borrowers to moderate the risk of bad debt. The lender has the power to choose the borrower who will lend his money, this also helps to mitigate the risk. Peer to peer lending company also faces a risk of investment in cases of bankruptcy.
A flourishing example of an online investment company is the Bitbond. Bitcoin investment is one of the most speculated and watched currencies in the world. It is a method of payment solution for growing companies. It is a payment solution and just like money; there are enough bitcoins in the world. It helps in a typical banking transactions elimination; there are no fees in money transfer between the lenders and borrows. Just finding a peer is all that is required, you will be able to save the high-interest rates offered by banks which can go more than 2.5 per cent.
Having a supply of 21 million coins bitcoin is very deflationary. It allows investors to have more exposure to the price movement. Any investors can use safe keep, store and buy the bitcoin freely. Bitcoin is not only thriving but also has passionate fans making the leading currency of the internet. It is advisable to invest in bitcoins as many other businesses and individuals are using it. It has a fixed supply; it is a better way to transfer money all over the world. It is cheap, almost instant, and cheap. You will have less to worry on defrauding or even counterfeiting.
In many states, peer to peer investments is regarded as legal by the government. However, the government does not guarantee for the investments, but there is always the choice of the lenders who will lend their money. There will always be better odds for one looking off or individual or business loans. On the other hand, there is a guarantee for better and more promising returns for the investors. Peer to peer lending company is always being a better choice to traditional banks. Beside the good returns and loans, there is a minimal risk.
Definition of P2P lending terms
In the course of this discussion, a lot of new terminologies will arise and it’s best we discuss them first to ensure clarity.
1. Fractional investing simply means that multiple investors come together to aid a borrower in raising a specific amount of cash. The amount is designated amongst them i.e. suppose a borrower would wish to raise $2000 then the amount is divided among the investors usually with a figure as low as $25 until the threshold is met.
2. Notes – notes are partial investments that are at the disposal of the investor. They are categorized from least risky to most risky the latter attracting higher interest rate.
3. Whole investment – one investor agrees to raise the whole amount requested by the borrower.
4. Interest – this usually the fee charged by the investor for helping a borrower raise cash, it is a percentage of the principle, it varies depending on the riskiness of the loan and expected returns.
The leading P2P sites in the US are prosper.com and lending club, however, there are a number of others still growing. It is critical to note that P2P lending is regulated by the various financial laws and other states do not allow their existence. That cases are Texas and Ohio which have banned their operation deeming them too risky.
Sites offering peer to peer lending uses automated algorithms to gauge borrowers request as they hit the site. The following are considered; the amount requested, the borrower’s credit score, the length of the loan and the interest rate. This is done to come up with the best possible return for the investor while on the other hand balancing of the risks is involved.
Pros of P2P lending to an investor
P2P lending has a myriad benefit to the investor key among them that it offers a platform for the non-accredited investors to make money by offering loans to borrowers and reaping the interests. It is easy to start because there is no huge capital needed, for as low as 25$ you are on your way to becoming a potential lender. The returns emanating from P2P lending is more often than not steady and not prone to fluctuations like in other passive investments like stock and securities.
Pros of P2P lending to a borrower
Being a member of any peer to peer lending site, for a borrower has immense advantages key among them being the ability to access an unsecured loan. This sites also act as a bank to the borrower only that the bureaucracies, the long and tedious requirements need to acquire a loan at the conventional bank are greatly minimized. The speed at which the funds can be offered is also enhanced, some p2p lending sites also offer an attractive interest rate.
P2P lending is breath of fresh air from the conventional banking. To boost your chances of finance first, you need to be timely on your repayments to elevate your credit score. Create a ‘killer’ profile on your online platform since some sites refers to your profile before awarding you the loan. One such site is zidisha.org which puts a lot of emphasis on the user profile before approving their loans.
P2P lending is an ideal passive investment suitable for a non-accredited investor to make that extra cash while pursuing other goals in life. Careful thoughts ought to be put on the credit score of the borrower’s to avoid losing money due to defaulting. This is the ideal platform for raising money to meet financial emergencies that sometimes crop up during a lean time. Be always timely with your payments to boost your credit score among lenders to enhance the chance of higher credit in the future and also get lower the interest rate.
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