What is Peer-to-Peer lending?
Peer-to-Peer lending (abbreviated P2P lending), also known as crowdlending, is a way of lending money to individuals or companies through online services, also named lending marketplaces. A Peer-to-peer marketplace platform give investors the opportunity to invest directly into loans that are originated by so called “loan originators”, wich are non-banking financial institutions, from all over the world. They list their loans on the platform for investors to buy (usualy the investors buy parts of the loans). When the borrowers make payments on their loans the investors receive the principal and interest from each instalment until their investment is paid off.
How it works?
- Borrowers apply for a loan at the loan originator.
- The loan originator evaluates the application, sets an interest rate and lends money from its own funds.
- The loans are then listed on the marketplace, where both individuals and institutional investors can select loans to invest in, thereafter receiving monthly principal and interest payments.
Each month, investors will receive payments from borrowers consisting of the principal and interest payments. Investors can choose to reinvest these funds in other loans or transfer them their bank or e-money account.
As with any investment, there are some risks. The biggest risk is associated with possible credit losses from investments. Investors can mitigate risks by diversifying – making fractional investments in several loans across different borrowers, loan types, loan originators, and geographies.
How investors make money?
Each borrower makes monthly payments according to their loan agreements, which can consist of principal, interest and late payment fees, or any combination of the above. The principal part of the payment reduces the carrying value of your investment in the loan, while the interest and late payment fee portion of the payment is treated as your income. Your portion of the payment, which is calculated based on your investment in any particular loan, will be added to your investor account after the payment has been processed. You can then choose to invest the funds in more loans or transfer them to your bank or e-money account. Because different loans have different payment due dates, most investors with multiple investments see a continuous stream of payments added to their investor account throughout the month.
Most platforms offers loans with buyback guarantee. A buyback guarantee is a guarantee issued by the loan originator to the investor for a particular loan, that confirms the loan originator will repurchase the loan from the investor if that particular loan is delayed by more than a specified period (usualy 30 to 60 days).If a loan with a buyback guarantee is delayed by more than the specified period, the loan is automatically bought back by the loan originator from the investor at the nominal value of outstanding principal, plus accrued interest income.
How can Peer-to-Peer lending become a stream of passive income?
Most lending platforms offers some way for investors to invest their your funds in an automated way, so called Auto Invest tools.
Auto Invest tools automatically implements your chosen investment strategy. After you have entered your investment criteria, Auto Invest will automatically invest in suitable loans. Once you have confirmed your investment criteria, Auto Invest will review loan listings and invest funds in loans that meet your preferences. Auto Invest will continue to automatically analyze and invest in suitable new loans as soon as they are listed. If you change any Auto Invest setting, all available loan listings will be rechecked to make sure they meet your investment criteria. Auto Invest is a very efficient tool for saving time spent on investing activities. It also allows investors to access newly placed loans in the system before manually-made investments.
How can you invest in Peer-to-Peer lending marketplaces?
Below you can find an overview of the major platforms sorted by geographical regions:
- US lending marketplace platforms:
- Lending Club
- Prosper (Overview can be found here)
- Funding Circle
- UK lending marketplace platforms:
- Zopa (Overview can be found here)
- Funding Circle
- EU lending marketplaces platforms:
- Mintos (Overview can be found here)
- Bondora (Overview can be found here)
- Viventor (Overview can be found here)
- ViaInvest (Overview can be found here)
- PeerBerry (Overview can be found here)
- EstateGuru (Overview can be found here)
- BulkEstate (Overview can be found here)
- Grupeer (Overview can be found here)
- Envestio (Overview can be found here)
- Lenndy (Overview can be found here)
- Fast Invest (Overview can be found here)
- Crowdestate (Overview can be found here)
- DoFinance (Overview can be found here)
- ReInvest24 (Overview can be found here)