What is peer to peer lending?
This is my firsts post in my new series about peer to peer lending, otherwise known as p2p lending. I will go into details about its pros and cons, overall market review, potential strategies and platform reviews. We shall begin the series with an
How does p2p lending work?
In short, peer to peer lending main principle is to skip the traditional middle man and introduce capital holders to people or business that need money. Traditionally that was done via banking. Capital holders would put their money into a bank as a deposit and gain interests for that. Meanwhile, the bank would look for anyone who is in need of money, for a mortgage, business investments or bigger purchases and would lend them money for much greater interests than it gives for a deposit. In this traditional scenario, it was the bank who took most of the risks with lending money. It had somewhat guaranteed to pay back deposit money. But there is always a chance that the debt won’t be repaid so it is the bank who takes the loses for bad loans. And the deposit holder is virtually risk-free. (You still can lose your deposit money in special scenarios, but those are rare.)
Then came peer to peer lending
So in peer to peer lending, capital holder basically acts as a bank,
What is a p2p platform?
Peer to peer lending would be hard if each lender would have to personally find every person to lend money. That would just take too much time and resources. And thus came p2p platforms. They work in the same way banks worked in the before described traditional model, but now they minimize risk themselves. All of the risks are outsourced to the capital holder. It’s his money that is at risk, the platform has 0 of its own capital lend out. So the platform looks for potential clients, that are in need of capital and introduces them to capital holders. If everything works out, and loan money is secured, usually most platforms take some sort of finders fee or a percentage of interest for themselves. And from mine experience looking into different platforms, most of the fees are paid by the person borrowing money, person lending money directly has no fees.
In short peer to peer lending platform connects the capital to people or business in need of it, takes a small part of interests and leaves all risks to the lender.
Types of peer to peer lending platforms
So far I personally saw only two types of platforms. General peer to peer lending platforms and real estate financing focused platforms.
General peer to peer lending platforms
Most famous of this
Real estate financing platforms
Real estate financing works basically the same way as general peer to peer lending, but it mainly focuses on real estate project financing. I am personally less familiar with this type of financing so I don’t know a lot about different platforms. But personally invested small part in Nordstreet.com platform just to test the waters, it’s also one of Lithuanian p2p platforms. I don’t know which platform the most famous, but the biggest platform that I know is Estateguru.co based in Estonia.