Fintech is gradually revolutionizing the global finance scene – one of the most recent changes is Peer to Peer lending, which seeks to cut out the bank’s traditional role when it comes to giving out loans and other forms of personal cash to borrowers.
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What is Peer to Peer Lending?
Instead of saving all your cash in a bank account that earns less than 2% interest or stressing over the best stock or shares to buy, you now have the option of earning in excess of 10%, passively, on the cash you deposit with an online P2P lender.
Peer-to-peer lending, also frequently referred to as P2P lending, involves lending money to individuals and companies through online services, which match lenders with borrowers.
Because peer-to-peer lending companies operate online, without a high-street presence, they have significantly smaller overheads, and this can then be passed on to consumers in more competitive interest rates and associated costs. The emphasis is on nimbleness, agility, and convenience, rather than the traditional, and sometimes stuffy, the appearance of established financial sector organizations.
However, peer-to-peer lending also differs from the traditional alternative by being an investment opportunity that is frequently conducted for profit. Because of this, peer-to-peer lending is often characterized as being an alternative financial service. Also, although it was originally envisaged that peer-to-peer lenders would be entirely separate from the established financial architecture, as the sector has grown and developed, so partnerships have increasingly been sought with established players.
How does peer-to-peer lending work?
Considering the way that the peer-to-peer sector works, most P2P lenders provide online investment platforms, which enable borrowers to attract lenders, and investors to identify and purchase lending opportunities that meet their requirements. Peer-to-peer lenders have also developed their own independent credit models, which have enabled them to suitably price and deliver approval for loans.
This is a rapidly developing sector, and thus a huge amount of competition has arisen in a fairly short timeframe. There are lots of peer-to-peer lenders competing for your custom, and attempting to separate the wheat from the chaff can be something of a baffling process. So in this article, we’re going to examine five of the top peer-to-peer lenders available, and explain exactly why you should opt for their services.
Why invest with a p2p lending website?
- Not affected by stock markets: P2P lending institutions are listed with the stock exchanges. How much you make here is therefore not directly affected by fluctuation in the equity markets and can, therefore, be used as a hedge against your share and stock interest.
- Offer higher rates compared to shares and banks: Most savings accounts by banks have their interest rates way below 3%. Not even the fixed income securities offered by the corporate and treasury bonds can match the 10%+ interests rates offered by the most peer to peer lenders.
- You don’t need to be an accredited investor: Most stockbrokers won’t facilitate your share and equity investments if you aren’t an accredited investor. You, however, don’t have to be an accredited investor to deposit funds with a P2P lender.
- 100% Passive income: Unlike such investments like stock and forex investments where you have to spend hours on end researching and analyzing different products, P2P lending is 100% passive. Some lenders even have auto-investing tools that automatically redirect your paid principle and interests to the market.
- Affordable minimum investments: While most investment vehicle currently available require huge initial deposit amounts, most P2P lenders have relatively affordable deposits, starting from $25.
Criteria used to rank the best P2P lenders
The P2P lending world is awash with countless lending sites, each claiming to have the best rates and the most reliable services. How then did we identify the most reliable lenders that you can register and invest your funds with? Here are some of the aspects of the trade that we used to vet these P2P lenders:
- Average annual return on investment
- Are they regulated or not?
- Management fees and trading cost
- Ease of liquidating your investments (secondary markets)
- Security of the invested loans
- Regulation and reliability
- Borrower’s vetting process
- Follow up on late payments and defaulters
- Acceptance of accredited/unaccredited investors
Best Peer to Peer Lending Sites 2020
There exist countless peer to peer lending websites that won’t just help you earn a steady income from your investment but will also help you save towards a particular goal. You just need to learn how to differentiate between reliable and unreliable lenders. On this list, we include what we consider the best in terms of high returns, guarantee for your investments, lowest minimum investment, liquidity in case emergencies, and support for goal saving. Start by figuring out your priorities and matching them with the most suitable lender. For instance, do you want to invest your cash but still have quick access to it in case of emergencies? Invest in P2P brands with active secondary markets.
How do peer-to-peer lenders make money?
Peer-to-peer platforms generate origination fees that are charged to borrowers, while interest charges also accumulate further revenue. In this respect, peer-to-peer lenders are not too different from traditional bank loans.
Are P2P platforms regulated?
The worst mistake any investor can make is to join and commit their money in funding ventures on a platform that’s not legally regulated. An unregulated business environment has all the hallmarks of a black market, and that means that the risk of you losing loads of money is optimal. Why would anyone want that? Luckily, peer-to-peer platforms are regulated by the relevant authorities in the countries where they operate. In the event that you want some help in sorting out an issue, you can contact the Securities and Exchanges Commission or any other national body tasked with overseeing the platforms.
Can I diversify across different borrowers?
In an environment as active as a lending platform, you bump into all sorts of loan requests spread across a number of different lending options. You can spread your investments across these options and stand to gain by reducing the risk of loss and increasing your overall investment volume. Also, you boost your turnover and money circulation around various lending drives. In essence, the trick is to avoid funding any loans in full. That way, you reduce the amount of your money exposed to a single risk. If one loses a small amount, the interest gained from the rest can always cover it and cushion you from a net loss.
Do I have to contribute the full amount of a borrowers investment?
When you join a peer-to-peer lending platform as an investor, you have a choice to either fund a borrower’s guaranteed approval loan in full or contribute an amount to it. The latter plays out when different investors release proportions of their money to partially fund one person’s loan. The interest paid on the full amount is then distributed to the involved lenders respective of their contribution amounts. Whenever you come across a loan request that interests you, you can always contribute to it as opposed to footing the whole bill.
Is there any government protection for peer-to-peer lending?
No. Unlike bank and building society savings, any money lent via P2P websites is not covered by the Financial Services Compensation Scheme, nor any equivalent government schemes. The Financial Conduct Authority is regulating P2P lending, and there is now a requirement for lenders' money to be ring-fenced. But some peer-to-peer lenders have still hit problems, and this can definitely impact on those who choose to borrow from these companies.
What are the risks associated with peer-to-peer landing?
Firstly, there is a risk of default, and as we have just mentioned this would not be covered by any government support. While several peer-to-peer lenders have contingency and provision funds, the risk is still clearly higher than with a traditional high-street bank, for example. Another potentially serious issue is that the peer-to-peer lending site that you choose could go bust. Several such companies have gone out of business previously, which is why we have recommended several of the best current peer-to-peer lenders here. For one, many investors love the peer-to-peer lending arrangement by virtue of its good profits. They get to rake in some nice interest from their investments while the borrower gets a loan at low cost. In fact, the interest you get from peer-to-peer lending deals could well be higher than what you could get by investing with banks.
Is money earned through peer-to-peer lending taxable?
Usually, yes. It is almost always the case that money and through peer-to-peer lending is classified as income, and therefore is taxable, assuming that you reach your personal allowance for a given tax year. £1,000 worth of interest every year is tax-free in the UK, though, so in the current low interest rate environment, this won't impact on many people. However, it should be noted that higher rate tax payers are only afforded an allowance of £500, so this is more likely to impact on you if you have a significant level of income.
Does peer-to-peer lending show up on your credit report?
Yes. If you apply for a loan with any peer-to-peer lender, your credit report will definitely be checked. This will then create a hard credit check on your credit file, which will remain for a period of one year. It is possible, as with any credit application, that this could then temporarily reduce your credit score. And, of course, rejections for peer-to-peer loans are more likely to reduce your credit score further still.
What is peer-to-peer business lending?
Many peer-to-peer websites offer loans to businesses, which tend to pay the highest rates of return for investors. There are a wide variety of providers available on the market in this sphere, and all of the facets of personal and peer-to-peer lending apply similarly to the business market. With many smaller businesses struggling to acquire credit from traditional financial institutions, it is expected that peer-to-peer business lending will continue to grow in the coming years.
Can I withdraw money from my P2P account?
This is often only allowed at the end of the financial term, but is dependent on the terms and conditions associated with the individual lender. Furthermore, it is sometimes possible to sell your investments to another investor in order to get your money back.
Can I find out how stable a P2P company is before I invest?
Yes, although this differs slightly to the way that traditional financial institutions are assessed. It is possible to research the percentage of completed repayments that lenders have had from previous investments, which is usually publicized on the company's website.
How can I reduce the risk to my money in P2P?
Aside from following the tips and advice contained in this article, the best way is to invest your money with several borrowers, which will reduce the risk that your money will never be repaid.
History of P2P Lending Infographic