Peer-to-peer (P2P) lending is an up-and-coming way of investing that has seen rapid growth in Europe over the last few years. Of course, as with any investment, P2P lending has its pros and cons.
We’ve put together five of the biggest advantages and disadvantages of peer-to-peer lending that you should keep in mind before deciding to invest.
What is Peer-to-Peer Lending?
Put simply, P2P lending allows lenders to lend money directly to borrowers without the need for an intermediary like a bank. In practice, though it’s often a bit more complicated with P2P platforms offering up loans that have already been issued. This means that you’re investing more into the issuing company than the individual loan.
This offers you a much better way to gauge the risk of the investment because it’s much easier to find company details than whether or not a person is responsible with their finances. Find out more about how you can use P2P lending to your advantage.
5 Peer-to-Peer Lending Advantages and Disadvantages
Like any other form of investing, Peer-to-Peer lending has its advantages and disadvantages. Below, we’ve laid out three advantages and two disadvantages of P2P lending to keep in mind. However, depending on your investment mindset, some things might turn out to be advantageous in your eyes that we intended to be disadvantageous and vice versa.
Fixed return rates
When you invest in P2P loans, you know upfront what interest rate you will get. There’s no guessing, there’s no fluctuation. You see the numbers, and you decide whether that’s your target or not.
This can provide stability to your portfolio when stock and crypto markets go wild and can make astronomical gains but lose value just as quickly. The loan also works similarly to a bond in that you have a fixed term, after which the loan will be repaid, and you get your principal back.
No astronomical yield
With other assets, you can make 100%, 1,000%, or even 10,000% returns in 1 – 4 years (see Bitcoin or Tesla). It’s impossible, though, to predict the future and you can never know if such gains will be repeated and what the next Bitcoin will be.
With P2P loans, you have return rates of anywhere between 8% and 16%. Far less than 100% a year, which might turn off some investors and can therefore be seen as a disadvantage. On the flip side, due to the steady returns and stable return rates, some might even prefer it, as these rates carry a much lower risk with them than the 1,000% in 5-month schemes.
Low capital requirements
To get started investing in P2P loans, you only need:
- An internet connection
- A PC or mobile phone
- As little as 10 EUR
It’s as simple as that. While stock prices range anywhere from pennies to hundreds of Euros, P2P lending has much lower barriers to entry.
On Lendermarket, you can create your account and start investing in P2P loans with just 10 EUR. This makes it a great option to start a diversified portfolio from the get-go because you don’t need to have thousands of Euros in disposable income to divide among various asset classes.
Potentially lower liquidity
Not every market is liquid. In real estate, for example, you can’t just sell your house at market price in a matter of days, let alone hours or minutes. With stocks and cryptos, on the other hand, you can often liquidate your assets in a matter of seconds.
P2P loans are somewhere in between and vary from platform to platform. If the platform you use to invest doesn’t have a secondary marketplace where investors can sell loans they’ve already invested to other investors, then it’s fairly illiquid.
But if the P2P platform has a secondary market, it’s often just a matter of how attractive you make your offer to have it sold. If you have a loan that you sell for 5% under its value, it’ll likely find a buyer faster than if it’s 5% above or at par with its value.
Investing on autopilot
Finally, with P2P loans, you can often let your investments run on autopilot. This is due to the auto-investing features many platforms offer that allow you to set specific criteria for your investment, and according to which the “robot” will pick loans to invest in.
This makes it effortless to have a diversified loan portfolio while also investing in the loans with return rates that are attractive to you—all with two minutes of work.
Advantages of Peer-to-Peer Lending with Lendermarket
Investing in P2P loans via Lendermarket provides several unique benefits From auto-invest to a simple-to-use user interface to an excellent support team that’s always there to answer any questions.
Here are some advantages you have at Lendermarket:
- Loans from a variety of vetted loan originators from different countries
- Average Annual Return of 14.1%
- Auto-Invest tool to automate your investment
- Outstanding customer support team
- Secondary market coming soon
P2P loans are an interesting asset class that has many things to offer: high and fixed return rates, low entry barriers, and automatic investment features. On the other hand, you won’t make a 1,000% return in one year and if there’s no secondary marketplace, you can’t just decide to sell all your current loans on a whim.
So it’s up to you to decide what you are looking for and what you value. If the advantages of investing via Lendermarket are appealing to you, why not try and invest in Lendermarket?