peer-to-peer lending
admin July 25, 2022

Peer-to-Peer (P2P) Lending is a non-conventional method to invest your money in order to get a good return on your savings. As the name suggests, you earn the return on your investment by lending money.

Various platforms are out there that enable p2p lending, and it does not involve investing in stocks, bonds or any other kinds of assets. It comes into the picture when banks are removed. If you need money, you will likely be turned down by your bank due to one reason, and another and other banks may also spurn you for the same reason, but you have a way to borrow money from a community of individuals.

Whether you need money for personal or business needs, p2p lending can come in handy. In other words, it is an alternative to traditional sources of lending.

How does Peer-to-Peer Lending work?

P2P lending platforms connect borrowers and investors and charge them fees. Although this has become so popular among both investors and borrowers, it involves a lot of risks. If you are looking to become a p2p lender, follow the following steps:

  • You will have to choose the right platform first, like Lending Club, Funding Circle, and the like, and then you will need to create an account.
  • Once you have created an account, you will have to explore different loan options. The app you use may grade all loan products to weigh the risk involved so you can easily make a decision. Some apps even provide automatic investing tools.
  • After choosing the investment, you will allocate funds. It is entirely up to you whether you want to invest all of your savings into one type of financial product or you want to invest smaller amounts in different types of loans.
  • You can constantly track your earnings to see your investment progress. It is up to you if you want to withdraw them or reinvest them.

If you are looking to borrow money from a p2p lending platform, you will have to follow the following steps:

  • Choose a p2p lending site and then decide on the type of loan you want to take out.
  • Turn in the application form and wait for the pre-approval. The approval involves only a soft credit check.
  • You will choose a loan offer based on the interest rate, term, and payment options you like the best and wait for the investors to fund it.
  • Now a hard credit check will be run, and the funds will be credited to your bank account. You will start repaying the debt as per the agreed terms.

What types of Loans do Peer-to-Peer Lending sites offer?

You can get various types of financial products on p2p lending sites, but the most common include personal loans, business loans, and education loans. You can use personal loans for any purpose, whether you want to pay medical bills or you want to consolidate your loans.

However, the scope of borrowing money from p2p lending sites is much more than from online lenders. This is because it involves a pool of lenders who have their small portions in the total lent amount. Most of the people use p2p lending to fund their education.

This allows taking out a large amount of money that they can pay down in whatever way they prefer. Small and medium-sized businesses get the maximum benefit from P2P loans. These loans can be used either to launch a business or simply to invest in a marketing campaign.

When you apply for business loans in Ireland with a direct lender or bank, you cannot put in multiple applications but p2p lending will allow you to apply to different investors at a time that increases the chances of funding your needs.

Benefits and Drawbacks of Peer-to-Peer Lending for Investors

P2p lending has become a great way to earn a good return on your investments, but it is riskier. Before you make any decisions, you should carefully weigh up the drawbacks as well.

1. High Return on Investment

This is considered a better alternative to other investing options as it offers a higher return, probably between 3.5% and 7.5 %.

2. It Diversifies your Investment Portfolio

You can allocate your funds to different types of investments to whittle down the risk. Instead of throwing your money at one kind of loan, you can split up your money to invest in different kinds of loans offering different rates of return. You can start investing with as little money as €25.

3. It is Time-Consuming

Although p2p lending sites are known to offer you a good return on your investment, they are very time-consuming. Since a group of people like you drives the market, you cannot take the help of an investment broker or Robo-advisor.

You will have to do the entire market research for yourself. Each p2p lending site offers different types f loan products. You will have to analyze which one suits your needs. Further, each platform charges different fees. Some may cost you more fees resulting in a cut in your profits. Some lending sites offer automatic investment options, but fees could be higher.

4. It Involves a Great Risk

Although you can run a soft and hard credit check to analyze the repaying capacity of a borrower, there is no guarantee that your money will be repaid. A s banks and online lenders bear some risk, you will also have to take on the risk. A lot of borrowers do not pay back the money and you lose your hard-earned savings.

Advantages and Risks of Peer-to-Peer Lending for Borrowers

P2P lending is advantageous for borrowers, but it comes with certain drawbacks too.

1. Competitive Interest Rates

One of the significant benefits of using these platforms for borrowing money is that you can avail yourself of competitive interest rates. You can get money at more flexible terms and conditions than direct lenders.

It can help save money, especially when you are to consolidate your debts. Another benefit is that you are free to borrow a large amount of money because multiple investors will be funding your needs. You will get a sense of security that you may not get when you apply for credit cards and other expensive loans.

2. Most Times, it uses Soft Inquiries

At the pre-approval stage, lenders run soft inquiries; hence, you do not need to fear losing assets. At this stage, you can get to know the term and interest rate you can qualify for. This makes it easier for you to choose the best deal.

3. You may have to wait longer to get funds in your bank account

If you want to fund emergencies, p2p loans may not be the best option at all. This is because they are time-consuming. For instance, if you need quick loans on the same day in Ireland, you will have to contact direct lenders.

By using peer-to-peer lending sites, you will have to wait for investors to fund your needs. Before the money is transferred to your account, you would not just go through a soft credit check but a hard credit checks as well. This whole scenario may take a couple of days.

Bottom Line

Peer-to-Peer lending may be a better alternative to conventional investment options for investors because this provides a good return on them.

Likewise, it offers loans on more flexible terms to borrowers. However, it does not point out that they do not involve risks. Weigh up all pros and cons and then decide if it fulfils your needs.