Peer-to-Peer (P2P) lending is one of the fastest growing forms of saving that enable individuals to borrow and lend money without the use official financial institutions. With P2P, you are cutting out the middleman like the big banks through online services that connects lenders with borrowers. For an investor, it is simply a platform that lets you lend money to people or businesses searching for loans, and over a period of time, your money is paid back with interest.
As with all investments, there are certain risks associated with your investment. Your capital is at risk if the individual borrower defaults on the payment, but this risk can be minimised by spreading out your loan across different borrowers. This means if one borrower defaults on payment, only a fragment of your investment is at risk.
If you are thinking of whether to lend money through peer-to-peer lending, the decision is ultimately down to you, nonetheless you should decide whether you are happy or comfortable with the extra risk over a bank savings account.
Consumer Lending: This is the most common type of P2P lending and they are generally unsecured loans to individuals instead of business lenders. Loans in this segment are usually for debt consolidation purposes or to fund weddings, home repairs, car finance, etc. They are relatively smaller sized loans and have a relatively high number of borrowers looking for lenders on the P2P platform.
SME Business Lending: This type of lending is usually for small businesses looking to secure a loan. As it is increasingly difficult to get a loan through the banks in this economic climate, business owners are increasingly looking to get funds needed to grow their business via P2P lending. The loan may also be secured against the company’s assets like property or stock, or could be backed by a personal guarantee provided by the company’s shareholders or directors. Loans in this segment are usually for business expansion, cash flow purposes or for working capital.
Property Lending:This form of peer-to-peer loan is primarily for property developers, constructors or property investors either representing a limited company or as individual borrowers. Many borrowers searching for a mortgage loan are increasingly opting for peer-to-peer lending as an appealing alternative compared to the squabble that comes with getting loans from the big banks. In the event of a payment default, the underlying property will be used as collateral in order to repay the loan. Loans in this segment are mainly for personal mortgages, property refurbishment, commercial loans as well as buy-to-let properties.
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