P2P loans are an up and coming way to invest your money. Many P2P platforms offer high-interest rates and have a buyback guarantee to protect your investment. But what is P2P lending, and how can it enhance your portfolio? Read on to learn more!
What is P2P lending, and what are its benefits?
P2P loans are a relatively young asset class. The name is an abbreviation for ‘Peer-to-Peer’, meaning that loans are directly issued from person to person, without intermediaries like a bank. To facilitate that process, there are P2P platforms on which interested investors can meet interested borrowers to issue loans.
This system is sometimes called ‘crowdlending’ because you have a crowd that lends money to an individual or company. However, P2P lending evolved from this system to another way of investing, which we’ll go deeper into shortly.
Before we do that, here are some popular benefits of P2P lending as an investor:
- High returns of 8 – 16% per annum
- Security features like a Buyback Guarantee (not all platforms)
- Support interesting projects
- Invest in a wide variety of loans
Different kinds of P2P lending
Not every platform operates with the same underlying principle. On some platforms, you can invest directly into the loans offered by individuals, so it’s a straight flow of money from investor to borrower.
A more common occurrence nowadays is what we’ll call ‘indirect P2P lending’. With this form of lending, you are not providing funds directly to the person looking for a loan, but rather a company – the so-called ‘loan originators’.
It works like this – if someone is looking for a loan, they can approach the loan originator. The loan originator evaluates the potential borrower, and if they pass their checks and criteria, they will issue a loan. This loan is then offered on a P2P platform such as Lendermarket.
The benefit for the investor is that they don’t invest in individual loans directly, but rather in the underlying loan originator. As the loan originator is a registered company, they have annual reports and a track record that investors can analyze – offering a more streamlined way to gauge the safety of the investment.
Loan originators often offer a buyback guarantee for P2P lending. This means that if the borrower of the money defaults, then the loan originator will buy back the loan from the platform, and investors get back their principal and accrued interest.
Various loan types
On P2P platforms, there are different types of loan you can invest in. The most common ones are consumer loans and real estate-backed loans. The following table will show a comparison between these two types:
|Consumer loans||Real estate-backed loans|
|Interest rates (p.a)||10 – 16%||7 – 10%|
|Collateral||Backed by the loan originator||Real estate|
|Buyback Guarantee||Yes, on Lendermarket||Yes, on Lendermarket|
What are loan originators?
Loan originators are the companies issuing loans to the borrowers. Let’s take the Creditstar Group, one of Lendermarket’s largest loan originators, as an example.
Creditstar was founded in 2006 in Estonia and is now serving customers across eight countries in Europe, including Estonia, Finland, Sweden and the Czech Republic. They issue loans in the amount of €50 to €10,000 euros, for timeframes spanning five days to 36 months.
Why do loan originators use a P2P platform like Lendermarket?
It’s common for companies to collect outside capital to grow their business. The standard ways for this are selling stock, issuing bonds or getting venture capitalists on board. All of these methods have their pros and cons.
Using a P2P platform is a new way for loan originators to acquire funding without needing to issue long-term bonds, whilst providing access to this type of investment to retail investors.
How are the high interest rates possible?
Interest rates are in the low digits in Western European countries like Germany, Austria, Switzerland, and France. You will typically only see high interest rates of 15% if you were to enter your overdraft on a credit card, for example. For many investors from these countries, that begs the question – “How can P2P loans offer such high interest rates?”.
The answer is a difference in regional interest rates. Take Estonia, for example, a country where many P2P lending platforms and P2P loans originate from. The interest level is higher than the euro area average and thus, loans have a higher interest rate.
In many countries, payday loans are also a standard occurrence. These loans are often issued for a brief period of one week to one month but have an interest rate of 0.5% to 1% per day. This results in a yearly interest rate of 200% to 300%.
So with this information in mind, offering up a loan for 15% on a P2P platform is not that far-fetched anymore!
How risky is an investment in P2P lending?
If you invest on a platform that offers direct investments in P2P loans, such as if you invest into the individual or their project, you often don’t have any way of measuring their ability to pay back the loan. Perhaps they provide an income report; often, it’s just a description of the project. Furthermore, many times they are from another country than you.
When you choose to invest ‘indirectly’, by investing in loans that the loan originator has already issued, you have more ways to gauge the risk level. If they offer a buyback guarantee, you can look at the balance sheet and annual report to see how likely they are to pay back any outstanding loans.
If the numbers add up and match your criteria and willingness to take risk, it could be a suitable investment for you. Be aware that regulators are also looking into P2P platforms to provide a safer experience for investors.
P2P loans are an exciting way to invest that has previously only been available to companies or institutional investors. You can access a broad range of different loans to invest in, spread around different loan types and origin countries.
If you do your due diligence, P2P lending could even be an excellent way to build passive income.
With Lendermarket, you can start investing in P2P loans with as little as €10, and all loans offer a buyback guarantee.