What is P2P Lending?
To make this guide more cohesive, let us start by explaining to you what P2P, also known as peer-to-peer, lending is all about.
P2P lending is a system that processes direct loans between borrowers and lenders. These direct loans are typically managed and administered by a P2P firm. Do note that there are numerous P2P lending companies that offer various kinds of P2P loan investing opportunities. More importantly, whether you are a borrower or a lender, it is crucial for you to identify the risk profile and return of each P2P loan.
With that in mind, this article aims to help you be familiarize with one of P2P lendings many concepts. For today, we will talk about the three principal types of P2P lending.
Why Should You Borrow Money From P2P Lending?
To start things off, let us discuss why one should borrow money from a P2P lending company. Of course, there are risks involved in P2P lending, but every lending situation has risks. With that in mind, it is crucial for you to understand that P2P lending is not a bank account. It functions differently as compared to acquiring a loan from either a bank or a credit union.
Moreover, P2P lending is a form of investing. Nevertheless, here are some of the reasons as to why you should borrow money from a P2P lender.
The way taxes work is that an individual incurs penalties and interests if they cannot fulfill the regular payment of their taxes. The government will come after you for your other assets if you do not pay your taxes long enough.
With that in mind, taxes are actually a way for the government to imprison us. If in any case, you havent paid your taxes religiously, borrowing money from a P2P lender is an excellent option for you.
Every year, more and more people are now realizing the beauty and horror of starting their own business. In a way, you get to escape the rat race; however, you are also faced with numerous challenges as a startup business owner, one of which is pooling enough capital to start business operations.
Moreover, if you do not have enough money to begin with, you can loan the necessary money through P2P lending to establish your business.
- Home Improvement
During the housing bubble, numerous homeowners took out Home Equity Lines of Credit (HELOCs) and it was crazy. Whenever an economic bubble would burst, it is best that you always have some kind of backup plan.
If you live in an area where the price of houses and lots are high, it makes sense to simply expand and remodel the original structure. When you come to this decision-making process, youd be happy to know that P2P lending is an option for you.
In dealing with home improvements, it is recommended to borrow money if you are remodeling the bathroom, kitchen, or any infrastructure that requires an upgrade for security purposes. Everything else wouldnt be worth it to borrow money from a P2P lender.
What are the Three Principal Types of P2P Lending?
Just to recap, P2P lending is the practice of lending and borrowing money from unrelated individuals. Over the past decade, there has been an evident increase in P2P lending transactions. In 2014, there was only a total of 1 billion worth of lent money. Experts claim that over the next ten years, this amount is expected to reach a total of 45 billion.
With that in mind, it is best to start early. Try to familiarize yourself with the basic processes of P2P lending, the top P2P lending firms in todays market like Fundko, and the principal types of P2P lending, which will be discussed as follows:
- Consumer Lending
The P2P lending industry started with this type of lending. Consumer lending is where small and unsecured loans are granted to individuals. The way consumer lending works is that the online platforms buy personal data, which allows the borrower to be ranked according to their credit rating.
Typically, consumer lending is used for funding various purchases, such as cars, home improvements, holiday vacations, and weddings. Moreover, consumer lending is also used for debt consolidation.
- SME Business Lending
SME business lending is where small loans are granted to trading Limited Companies. Here, loans can either be unsecured or secured against the asset of the company or a personal guarantee from its shareholders.
Similar to consumer lending, SME business lending is done when online platforms buy business information from companies, such as Companies House, Equifax, or Experian, and they rank the borrowers according to their credit card rating.
It is important to understand that with SME business lending, the risk involved is that the company can go into bankruptcy. With that in mind, SME business lending is typically used for asset finance, business expansion, and working capital.
- Property Lending
With property lending, loans are granted to either individuals or Limited Companies. All loans involved in property lending are secured by a first legal charge over a commercial or residential property. It is crucial that these properties should be registered at the land registry.
Failure to repay the borrowed money means that the platform can repossess and sell the property as a means to redeem the unpaid loan. With that being said, property lending presents less risk as compared to the other types of P2P lending. Consumer lending and SME business lending doesnt provide any bricks and mortar security.
With property lending, platforms would use third-party professionals to value the property. Moreover, they would also need to ensure clear title over the property. Most of the time, property lending is used for personal mortgages, Buy-to-Lets, commercial loans, and residential refurbishment and development.