Before we venture out and try to understand how peer-to-peer lending platforms make money, it’s important to spend some time understanding exactly what it is these P2P platforms are doing. You might say that peer-to-peer platforms are providing loans, but providing loans is something banks have done for hundreds of years. If peer-to-peer lenders were simply doing what the banks have done, then that would not have been interesting enough to write about. After all, banks have been doing business pretty much the same way for the past century.
Peer-to-peer Lending Platforms vs Banks
Peer-to-peer lending platforms are very different to banks. P2P platforms can conceivably be described as social platforms where people looking for a better investment opportunity, or to increase savings, can lend funds. And people looking to borrow can borrow from the people lending – evidently.
What P2P lending platforms do is they create purchasable “loans”. Investors buy these loans and get money in the shape of interest plus repayments of original capital. The money they invest in the loan is given to the person requiring the loan; quite a simple idea, but to achieve higher interest rates than traditionally offered is results in the system being scrutinized. This successful execution, where all parties benefit, including the peer-to-peer platforms, is somewhat remarkable; risks apply, and the lifeline of P2P lending is something bankers and the like question with bated breath.
Remarkable or not, the proof is in the pudding – better rates on your money, whether a sophisticated investor, new retail investor or retail saver seeking to simply boost their savings.
How Do P2P Platforms Generate Revenue?
One of the biggest selling points for P2P lending platforms is their transparency. Banks with their levels of hierarchy, heaps of paper work, hidden or difficult to understand fees and payment schedules have been the subject of scorn in recent years.
Borrower rate vs Investor Rate
From the inception of P2P lending, simplicity and transparency have been the most coveted features. With this in mind, most major peer-to-peer lending UK platforms are upfront with the borrower rate, which is the APR (%) repaid to the lending platform. The difference between the borrower repayment rate and the interest rate you receive annually as the peer-to-peer investor is the cut the P2P platform takes.
Each platform has slightly different fee charging structures. We shall see the different types of fees by giving examples of actual platforms, but make sure and compare the other platform features before making an investment decision, by clicking here:
Most platforms have moved away from the fee model that targeted both lenders and borrowers. For example, Landbay have two fee charges for borrowers: firstly, it charges its borrowers an upfront fee ranging from 2% to 2.5%. This fee is to cover the cost Landbay incurs in screening borrower’ profiles and the establishment of a new loan. Also they charge a 0.5% to 1.00% margin (per year) on the loan principal outstanding.
So, essentially there are two types of fees. Upfront fees for loan processing and a small margin built into loan plus interest repayments from the borrowers. Peer-to-peer investors are not charged anything.
(In short if Landbay takes £101 in interest from the borrower, they give £100 to the investor and keep £1 for themselves). Seems fair coming from a reputable peer-to-peer lender like Landbay whose security measures are highly revered in the industry.
Read what COO Julian Cork has to say on the matter in our recent interview.
Borrower & Investor Fees
Proplend is a platform that charges fees from both borrowers and investors.
Borrowers have to pay a Listing Fee and a Completion fee to Proplend. Also loans are secured against property. So any legal and valuation fee incurred in arranging a loan is also borne by the borrower.
P2P investors have to pay a fee equal to 10% of interest received. The fee is due when actual interest is received. Find more about Proplend and the features they offer on our comparison table by clicking here.
P2P lending platforms make money by charging fees for their services and more importantly taking a margin on borrower repayments to investors. Exactly what service do they provide? They provide investors an opportunity to earn arguably the best interest rates offered on the alternative investment market, and borrowers a means to borrow money without the hassle offered by conventional banks (and also offer better rates compared to banks).
In return, P2P lending platforms charge flat fees from borrowers and keep a margin of interest (they will charge an interest of 10.5%, giving 10% to the borrower and keep 0.5% for themselves). Sometimes both fees are charged.
However, some platforms also charge investors on the returns made. This model is however not mainstream with most platforms now charging only borrowers. Be sure to conduct a peer-to-peer lending comparison by visiting our Compare page before investing in a platform.