(Newswire.net — February 16, 2016) — Peer-to-peer lending or P2P lending, has been around for many years now. However, in recent years it has seen a huge growth in the number of people using P2P as an alternative means of borrowing, and also as an investment tool.
P2P lending or “crowd funding” as it is also known, has experienced a major growth spurt in the past 10 years. Zopa, the largest P2P lender in the UK, has issued loans to over 500,000 people, totalling £500 million.
According to the CEO of Advancis Ltd trading, a guarantor loans company based in UK, one reason for part of this growth was born out of the “credit crunch” that began in 2008. This was the bank’s knee jerk reaction to the bad loans they had made, and the losses they were experiencing. Then came the government bailouts, and the banks made it difficult for anyone to get a loan.
For certain businesses, this was a disaster as they relied on a steady supply of credit and loans to expand their businesses, and also to keep the doors open.
These businesses began looking for alternative means to borrow, and P2P lending was one of those alternatives.
Later many of the P2P lenders began granting individual or consumer P2P loans.
The market for this form of lending and borrowing grew, until it got to where it is today.
Advantages For The Borrower
* May receive better or lower interest rate on their loan than through the banks.
* May not be able to get a loan through mainstream lenders, P2P is an alternative.
Advantages For Investors
* May receive a better rate of return on their investment.
* Liquidity, you may be able to access your money.
The way P2P lending works is that investors pool their money together like a bank, and grant loans to borrowers, just like a bank would.
If someone had £10,000 to invest and just placed in a savings account, they may only receive a 3% rate of return. This rate of return may be linked to having your money locked in the bank for up to five (5) years. Many other savings accounts offer much lower 1%-2% rates. However, investing the funds in a P2P group, they may receive a much higher rate of return.
P2P As An Investment Tool
As with any investment, there can be a risk. Some investments carry more of a risk than others. Usually, the higher the rate of return, the higher the risk.
Some P2P lenders can offer up to 6% or higher s a rate of return, depending on the amount you invest, and for how long you keep the investment in place.
There are no guarantees with investing in P2P companies, however, they are now regulated, and required to keep capital requirement amounts.
Some P2P lenders have what they call a “provisional fund”. This fund is there to protect against losses, so you don’t lose your money should there be a high rate of defaults on loans.
In some instances, the P2P lender may charge the investor a small percentage to pay into this provisional fund.
When considering using P2P lending as an investment tool, it is good to figure your risk aversion, and then decide if a lender with a provisional fund may provide you better piece of mind.