What is the future of P2P lending

What is Peer-to-Peer (P2P) lending all about?

Everyone has certainly borrowed money at some point. Whether as youngsters from friends for a club visit, from parents for the new cell phone or as adults for a car or building a house. In times of digitization of the financial market, there are very interesting opportunities for private borrowers, but also for private lenders: so-called peer-to-peer lending. Peer-to-peer lenders offer an alternative to borrowing from your house bank, for example. Learn what peer-to-peer lending is and how it works for borrowers and lenders. A first important decision when it comes to P2P is the platform selection. Since this complex topic would exceed the scope of this article, the Enqome P2P Guide for the provider selection is recommended.

What is Peer-to-Peer Lending?

Peer-to-peer lending (also called P2P) matches people who need a loan with people who are willing to lend money. Most P2P lending does not require any collateral.

The entire loan amount can be financed by a single investor or by many investors who contribute smaller amounts. Regardless of how many investors are involved, the final funding will be handled through the P2P marketplace to which you applied.

How Much Can I Borrow with a P2P Loan?

Some P2P lenders offer loans up to 40,000 euros, while others provide a maximum of 10,000 euros. Before applying for a loan from a P2P lender, one should check the credit limits.

How P2P Works for Borrowers

Borrowing money from a P2P lending platform is similar to borrowing from a traditional lender: you log into a peer lending platform and submit a loan application. This does not affect his creditworthiness. The lender assigns a risk level to the application based on its creditworthiness, income, and other factors.

People interested in borrowing money (called "investors" because they are investing in the borrower) look at the application. Don't worry: the identity will not be revealed. In this step, the investors simply review the documents and decide whether to borrow money. When one or more investors sign to fund the loan amount, the lender approves the loan.

You then submit documents that verify the information, such as ID and salary slips. The credit platform does a "hard credit check" to ensure that all information is correct. A tough test will hurt his credit score a little, but his score should recover quickly with regular monthly payments.

Once the final approval is received, the funding process begins. The time it takes for the money to be in the bank account varies depending on the lender, but can range from a few days to three weeks.

How P2P works for investors

With savings interest rates plummeting for years, savers and investors have been looking for alternative ways to get interest on their money. This has resulted in a rapid increase in the number of P2P portals on the market and the number of people using them.

Should you decide to become a P2P investor, you need to create an account with a P2P platform and then transfer the amount you want to invest.

One will have to decide:

  • how much you want to invest - the minimum amount is often 1,000 euros, but some providers allow you to invest smaller amounts
  • what interest rate you want to get - higher interest rates usually come with a higher risk of losing all or part of your money
  • how long you want to lend your money - for example two, three or five years.

In most cases, the amount invested will be split among different borrowers. This can reduce the risk of losing a lot of money if a borrower defaults or is unable to make their repayments.

How Much Can Investors Earn?

You can expect to earn anywhere from 3 percent to 9 percent peer-to-peer, but that depends on how long you are willing to invest your money and who you lend it to. You will get a higher interest rate if you invest longer and take more risk.

The return on P2P lending depends on the borrower's credit rating. So if you like to give loans to individuals or companies with lower credit ratings - where the risk of default by the borrower is higher - the interest rate offered will be higher.

Conversely, if you prefer a lower risk and only lend to people who are less likely to default, the interest rate will be lower.

It should be noted that the interest rate you see on a P2P website is not guaranteed - instead it is a “projected” or “target” rate of return, which means you could actually make less.

What are the risks?

When considering using a P2P platform, it is important to understand that you are investing your money (rather than investing it safely), so there is a risk that you will lose some or all of the amount you invest. In other words, P2P should by no means be viewed in the same way as a traditional savings account.

The future prospects of the peer-to-peer (P2P) credit market

Peer-to-Peer Lending Market is expected to grow at a significant pace, according to a representative report from JC Market Research. The latest research report, titled Global Peer-to-Peer Lending Market Insights, Forecast to 2026, provides a perspective on the global P2P Lending market. The analysts believe that changing consumer habits are likely to have a major impact on the overall market.