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P2P Beginners: What is Peer to Peer Lending?

By Jordan Stodart | On July 12th, 2018

In this new series of ‘Beginners’ mini-guides, we’ll be covering key questions, such as: What is peer to peer lending? Why do people invest? How do I conduct research? Who are the major players? How do I invest? Every fortnight we’ll publish a new mini-guide. This is for beginners, but can be useful for investors with any level of experience.

 

What is peer to peer lending?

For investors, peer to peer lending (P2P) can be considered an investment. Investors (commonly known as “lenders”) lend money across online platforms to individuals or businesses, earning a return from the interest payments made by the borrower(s) during the loan. By spreading funds across a large number of borrowers, investors can reduce the risk of borrowers failing to repay their loans.*

Different P2P platforms offer different loan types. Some fund property developments, the growth of a business or individuals, perhaps wanting to purchase a car. The returns investors can expect vary in relation to the type of loans they fund.

Returns on a peer to peer investment typically range from 3%-20%, annually.

 

*Important: The loan contract is direct between the investor and the borrower. If the borrower fails to repay their loan, the P2P platform may step in to help recover money owed, but ultimately the investor is the one who bears the risk of losing their money. Peer to peer lending is regulated by the Financial Conduct Authority (FCA), but money invested is not protected by the Financial Services Compensation Scheme (FSCS). This is unlike cash held in a bank which is protected by the FSCS.

 

How it works

There are three parties involved in peer to peer lending. These are the investor, the platform, and the borrower. Below are their roles and responsibilities.

what is peer to peer lending explained

 

Investor responsibilities

  • Investors research different investment opportunities online
  • Decide which investment is best for them
  • Commit money to the loan, for a set period of time.

 

P2P platform responsibilities

  • P2P platforms assess the quality of the borrowers they make available for investment
  • May take security on the loan, such as property, which can be sold if the borrower fails to repay their loan
  • Manage repayments of interest and capital.

 

Borrower responsibilities

  • Borrowers must provide accurate information about themselves and the purpose of the loan
  • Make repayments to the investors during the loan.

  

Who are the borrowers?

There are three borrower types in P2P: consumer, business and property. Borrowers take out loans for a variety of reasons, from funding a car to expanding a business.

Borrowers may have to provide assets to secure the loan, and in all instances are required to repay the loan, including interest, for the length of the loan. Loans can range from six months to 5 years, typically.

 

Thanks for reading. Coming soon! ‘P2P Beginners: Why Invest in P2P’ mini-guide. Feel free to get in touch if you have any questions via phone (0131 510 7376) our Live Chat or by emailing [email protected]

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