P2P loans
What are P2P loans?
Peer-to-peer (P2P) lending is lending that people or businesses get from other people or businesses without going through a traditional financial institution. It works like this:
- Borrower: Submits a loan application P2P platform, which describes the amount of the loan, the interest rate and the reason for the loan.
- Investor: Decides to support borrowers by lending them money, either in a lump sum or in instalments.
- Platform: Connects borrowers and investors, facilitates the loan application and remittance process, and can also provide credit assessments and collection services.
In this article you will find answers to the questions:
What are P2P loans?
What are the sub-categories of P2P lending?
How to make money with P2P lending?
What are the advantages and disadvantages of investing in P2P lending?
What are the risks associated with P2P lending?
How to invest in P2P lending?
What are the subcategories of P2P loans?
P2P loans can be categorised in different ways. Some examples:
By borrower type
Peer-to-consumer (P2C) loans
These are the most common P2P loans, where people borrow money from other people. The loan amounts are usually smaller and are borrowed for personal expenses such as a car or home repairs.
Peer-to-business (P2B) loans
Companies borrow money from investors to support growth or to raise working capital. Loan amounts are usually higher than P2C loans and companies are more thoroughly assessed.
By existence of a guarantee
Loans guaranteed
The loan is secured by the borrower's assets, such as real estate or a vehicle. If the borrower is unable to repay the loan, the asset is sold to repay the loan. Secured loans are usually less risky for investors, but the interest rate may be lower.
Unsecured loans
The loan is not secured by any assets. These loans are riskier for investors, but can also offer a higher interest rate.
By existence of a guarantee
Fixed interest rate
The interest rate on the loan is fixed for the duration of the loan.
Variable rate loans
The interest rate may change during the loan period according to market conditions.
Which subcategory suits you depends on your preferences:
- Are you looking for a higher interest rate or do you prefer lower risk?
- Do you want to support businesses in a specific sector?
P2P platforms usually offer filters to help you find the right loan or investment option for your needs.
How to make money with P2P lending?
There are two main ways to earn money from P2P loans:
Investing
- Invest in P2P loans to earn interest on loans you have given to others.
- Interest rates vary between platforms and borrowers.
- Think about diversifying your investments to reduce risk.
- Research the platform and the borrower before investing.
Granting a loan
- Borrow money via a P2P platform to earn interest.
- Set your interest rate and the terms of your loan.
- Assess the borrower's creditworthiness and ability to pay.
- Use the automatic investment feature to automatically invest in loans that match your criteria.
Strategies for earning money from P2P lending:
- Diversify your portfolio: Invest in several loans to reduce risk.
- Invest in different loan categories: Invest in both secured and unsecured loans to find the best balance between risk and return.
- Reinvest your interest: Reinvest the interest you earn to accelerate the growth of your money.
- Use the automatic investing feature: This feature helps you to automatically invest in loans that match your criteria.
- Monitor your investments: Monitor the performance of your investments and make changes if necessary.
Advantages and disadvantages of P2P lending
Benefits
Cons
Potentially higher returns compared to traditional savings accounts
A good way to diversify your investment portfolio.
A more direct role in supporting borrowers.
The risk of borrower default. The investment may result in losses if the borrower fails to repay the loan.
P2P loans may be less liquid than other forms of investment. It can be difficult to withdraw your money quickly.
P2P platforms may require a minimum amount to invest.
Risks of P2P lending: it's important to be aware
When earning from P2P loans, it is important to be careful and consider the following. with risks:
Borrower default risk
Investing in P2P loans is risky and borrowers may not be able to repay the loan.
Platform risk
P2P platforms are a relatively new phenomenon and it is possible that a platform could go bankrupt or close down.
Liquidity risk
P2P loans may not be as liquid as other forms of investment and it can be difficult to withdraw your money quickly.
How to invest in P2P lending?
1. Choose a P2P lending platform
Explore and compare different P2P lending platforms. Think about fees, loan types, investor protection and ease of use.
2. Open an investor account
During the application process on the chosen platform, you will provide the necessary personal data and identify yourself.
3. Add money to your account
By transferring money from your bank account to a P2P account, you get money to invest in loans.
4. Set your risk tolerance
P2P lending can be risky, so it is important to assess your risk tolerance. Platforms usually classify borrowers according to creditworthiness.
5. Invest in loans
Browse loan letters on the platform. Each description includes the borrower's profile, loan amount, purpose, interest rate and repayments.
You can choose individual loans or use the automatic investment features that automatically invest your money based on your pre-defined criteria.
In addition
- Diversify: Don't put all your eggs in one basket. Invest in several loans to hedge the risk.
- Start small: Particularly when starting P2P lending, it is a good idea to start with a smaller investment to gain experience and comfort with the platform.
- Set realistic expectations: P2P lending can offer attractive returns, but remember that it is not a get-rich scheme. Be prepared for potential losses and market fluctuations.
- Find out before: Understand the borrower's situation and the terms of the loan before investing. Look for platforms that have a strong borrower vetting process.
- Stay informed: Regularly monitor your investments and the performance of your loans.
English (UK) 
Eesti