Peer to peer lending is a great and flexible way to earn high returns on your money without doing a lot of research to learn about investing as you have to do in shares or property. Through P2P lending, a lender can directly lend money to borrowers without the bank’s involvement or any middle man. In recent years more and more people are getting into this type of lending. The reason is clear that when people invest in loans through banks, they receive a low return on investment. Moreover, it is easy to invest in p2p lending. All the process is carried out online through peer to peer platforms. Another thing that attracts investors is investing in P2P lending through IFISA and earning tax-free interest.
Types Of Peer to Peer Lending
There are three main types of p2p lending, which are as follows:
- Lending to individuals
- Lending to businesses
- Lending against property
The type of ending may vary from platform to platform. For example, some platforms focus on providing only one type of lending, while others offer all three types. You may not need to get into deep details of these types, but it is better to know how our money is going to be used. And what risks are associated with each type so you can invest in a better way?
Lending to Individuals
It is how p2p lending was started. In this type, money is lent to the individuals no matter what is the reason for lending. In starting, borrowers could say for what they needed the money and investors choose the project they think is worth their money, whether it was for a holiday or for making a new kitchen or emergency repair of a car. However, consumer lending or individual lending is still the same thing, but now the reason for lending is mostly hidden. The platforms decide who to lend the money on the basis of specific criteria such as credit scores and income source.
This type of p2p loans is unsecured. That is why there are more chances of risk in this type of lending. If a borrower defaults, you do not have any security for recovering your money.
Lending to Businesses
There are several reasons when businesses also need to take loans, such as fund expansion, maintaining cash flow, paying wages or buying new equipment. Such loans are secured against business assets or personally guaranteed by the business director who owns business assets. Therefore, the chances of risks are less as compared to individual loans.
Lending Against Property
Peer to peer loans can be sacred against the property; however, these are different from long term mortgage loans. Instead, these loans are short term loans and also known as bridging loans. People take such loans to fill the gap between purchase and sale of a property, renovation or refurbishment of property or a property development project.
Although your investment is secured against the property of the borrower, still there are risks. Such as the chance of a development project going wrong or a sale of a property delayed if no buyer is found. A significant advantage of this lending is that you can sell the property to recover your amount if a borrower defaults.
Like all other investments peer to peer lending also has risks like all other investments. Most p2p platforms allow you to choose the type of loans and borrowers, so you must keep in mind the risks associated with all the p2p loans and choose with the lowest risks. However, you can earn high returns on investment and make p2p lending a source of passive income when you invest by taking measures to mitigate the risks.