Peer-to-Peer lending (or P2P), is a relatively new asset class in the world of finance that has gained traction within the last decade. Most recently, the past 5 years have seen an explosion of p2p lending platforms offering different investment options, rates of return, business models and the assets they invest. As the baby of the alternative finance world, Peer-to-peer lending platforms have paved the way to a fair and competitive marketplace that challenges the traditional monopolization held by the high-street bank giants.

The banking landscape has undergone a major shift where an individual person, like you, can now become the lender and earn the exciting interest rates that were previously not accessible to anyone outside of institutions.

Do you need to have a financial background to take part? No. Do you need access to huge amounts of cash to get started? Nope. Do you need any special licenses? Absolutely not.

Let’s review 5 things you should know about Peer-to-Peer lending, whether you’re a complete beginner or a P2P veteran.

1. Investing options

This is different across every p2p lending platforms but in general, you can break the types of ways to invest in to three different options. The first is some kind of automatic or managed option, where you essentially click ‘Go’ and the platform does the rest for you. Some platforms allow an element of choice with this, such as what risk you would like to take and what target net return you have in mind.

The second type can be classed as manual/semi-manual, meaning you take the wheel and pick a number of customer filters which allow you to whittle down your selection of investments to match your specific criteria. Some argue that this can be more lucrative in the long-run, however it completely depends on personal choice.

The third and least common option available is to invest via an API, it’s fair to say that this is only suited to investors with a technical background or those who have the availability to invest significant time learning how to build their own API.

2. Secondary Market

Most platforms now have what is called a Secondary Market, we’ll use an example of investing in unsecured loans to explain how this works. When you invest in a loan, it may have been issued to the borrower for a term of 36 months. The borrower makes their repayments each month including the principal and interest payments and at the end of the 36 months (assuming all payments have been made), the loan will conclude and the investor will have received all of their original principal back in addition to the interest.

An investor may decide after 18 months that they want to withdraw their investment in the loan and use the funds for another purpose. In this situation, the investor would have to list their investment in this loan for sale on the Secondary Market which can then be purchased by another investor.

3. Different assets

While P2P may be viewed as an asset class on its own, peer-to-peer lending platforms commonly offer completely different and unrelated investment opportunities. For example, Bondora only offers investments in unsecured loans which individual borrowers take out for a variety of purposes, such as home renovations or a one-off large purchase.

Other platforms may only offer investments in property, where your investment accumulates with others to fund one large total investment in an apartment building or development project. Some platforms even offer investments to fund a business loan for either an established or start-up business.

4. Rate of return & Fees

When investing in the different assets mentioned above, this can have a direct correlation with the rate of interest you can expect to receive back on your funds. Ranging anywhere from 4% to 20%+ expected return, this varies significantly between p2p lending platforms and can also be determined by the duration you want to invest for.

Some platforms also charge management fees to allow you to invest through them, others may only charge these fees once you come to make a withdrawal. Due to each platform having their own expected net return and fee criteria, it’s best to employ a holistic view when making your decision of where and how much to invest with separate platforms.

5. Third parties

This one may not be as significant for every investor as the other points, but it’s still good to know all the information and make an informed decision on where you choose to place your funds. In the most basic terms there are two parties involved in P2P lending, firstly you (the lender or investor) and the borrower.

A platform may choose to outsource their borrower operations to third parties who provide the investors with customers who need loans. In another scenario, a company might internally source all of their own borrowers and then look to larger institutional investors to fund these loans. At Bondora we keep both sides in-house, meaning we source our own borrowers and investors, with only approximately 5% of these investments coming from institutions. Overall, this lets us focus on building a product that benefits both our investors and borrowers.

So there you have it

Now you know 5 important things about p2p lending platforms, take a deeper look in to the platforms you already invest in. If you’re a complete beginner, get started today.

Source: www.bondora.com