Opportunities and risks of a no longer completely innovative financial product
Every now and then you have to borrow money, be it to make a short-term investment or to plan major purchases. But how useful is a P2P loan, or should you go to your bank in any case? And what if you stand on the other side and lend money to others?
What is a Peer to Peer Loan?
It is a form of borrowing and lending between individuals or “peers” without the involvement of a traditional financial institution such as a bank or building society. It is therefore similar to borrowing money from parents or relatives, with one big difference: In the private sector, you will most likely not pay me interest, but with a P2P loan you will.
Of course, there are also control bodies, i.e. companies that are behind these services (so-called “platforms”). They act as an intermediary between borrowers and lenders.
Is a P2P loan particularly cheap?
A P2P loan can result in lower interest rates than conventional loans. Whether this is the case for you or not depends on certain factors such as your credit rating. Some of the best deals are only available if you have excellent credit and no previous problems.
So if you only want to borrow a small amount, peer-to-peer loans can be cheaper than banks or building societies. The main difference, however, is that you can also borrow a small amount, which is not welcomed by all banks. Some peer-to-peer websites don’t have a minimum loan amount (unlike most banks and other popular lenders) that may be right for you.
A P2P loan is an option if, depending on your credit rating, you are having difficulties getting a loan from a bank or a building society.
Tip: If you are toying with the idea of taking out a P2P loan, find out more about one P2P Guide extensively on the subject.
What are the disadvantages of a peer-to-peer loan?
Depending on your credit rating, the interest rates for peer-to-peer loans can be higher than with banks or building societies. You will likely have to pay a fee to the platform to arrange the loan. If you get your desired amount from several people, which can happen with P2P loans, you may incur multiple fees.
You may not have the same protection as you would with another lender using a peer-to-peer platform. This depends on how the loans are taken out and who the lenders are – for example, whether they are institutional investors or private individuals. Ask the platform how this works and how it differs from a regular loan.
Before applying for a peer-to-peer loan, note the following: If you default on a peer-to-peer loan, the company may pass the loan on to a collection agency who will track it on behalf of the lender or lenders. As a last resort, it could go to court.
Missing payments or a default on your credit will affect your creditworthiness. Once the loan agreement is in place, the peer-to-peer loan website will register an entry on your credit report in the same way as most other loans.
A peer-to-peer loan as an investment opportunity
A P2P loan may not only be of interest to you if you want to borrow a small amount that is too low for a bank. You can also use it to act as a lending peer yourself and thus generate a return.
To do this, you register on an established and trustworthy platform and go through the appropriate steps. As soon as your identity is verified, you can respond to loan requests from private individuals. Based on the individual risk, you can decide whether you want to lend the person money and at what interest rate this should happen. As a newcomer, however, you will usually get sufficient help to assess the risk. Here you have the opportunity to lend very small amounts at an attractive return. The risk is calculable, so that a P2P loan is very suitable as an investment.
- A P2P loan is suitable for you as a family if you either want to borrow or lend a fairly small amount. For larger investments like buying a house, you’d better seek out other lenders who can and want to afford a low interest rate.
- You can make a handsome return by providing peer-to-peer credit to others.
- A P2P loan can also serve a “good cause” – in many countries people build a livelihood with a P2P loan.
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