Crowdlending is quickly becoming one of the most popular ways for new investors to grow their capital and earning higher returns compared to the stock market.
The interest rates most investors get in a savings account is at historical lows on around 1%! This has made it ever more attractive to seek other ways to store your money and this is where crowdlending enters the picture.
What is peer to peer lending?
The folks at Min Investeringsguide also describes peer to peer lending in more details.
Crowd lending, also named peer-to-peer (or P2P) lending, is a way to loan your money to individuals or companies. Suddenly YOU become the bank and earn interest rates on your money. For example an investor can participate in a loan of 100,000 $ by contributing 1000$. The investor would already enter the loan with an agreed upon interest rate and payback time. The platform then utilize the entire process and you reap the rewards of your investment.
Peer to peer business lending?
Businesses as well as individual people can benefits from crowdlending.
A study was made and showed that as much as 12 % of new loans takes by small businesses are made in peer to peer platforms, and this segment has only just started to really grow.
P2P business lending is the majority of peer to peer loans, since they typically also require larger amounts of capital to start.
How does a peer to peer loan work?
- Investor joins the marketplace and transfers funds
- Marketplace / Platform matches investors money with borrowers either a business or an individual
- Loans are repaid after agreed upon time
- Investor received investment plus the earned interest rate.
- Repeat.
Borrowers
These are the people / businesses that want to receive money at a lower interest rate than the bank could offer them. The reason for using a crowdlending platform is they can receive their loan faster and could be for smaller projects such as home improvements.
Borrowers often seek loans on P2P platforms to avoid the hassle of negotiation with the bank and get offered a better loan on a platform.
Investors
Investors, also known as lenders are everyday people like you and me or businesses that want to loan people or businesses, in the hopes of receiving a higher return compared to putting their money in the stock market.
Peer to peer platforms
These platforms act as intermediaries between lenders and borrowers. There are two main categories of P2P lending platforms and it is peer to peer lending marketplaces and peer to peer originators that act more like a bank who interacts with both the investors and borrowers.
Peer to peer lending review
Lets quickly review crowdlending or peer to peer lending starting with the cons
Cons
For investors
- You might spend more time managing your portfolio compared to stocks
- Platforms typically have fees that can decrease your profits
- Borrowers can default and you lose your entire investment, and either lose the entirety of the investment or a part of it.
For borrowers
- Peer to peer lending can make it almost too easy to borrow money that you can’t afford to pay back.
Pros
For Investors:
- Chance to earn higher interest rates than investing in the stock market
- Wide array of P2P platforms
- Shorter time frames of investment compared to other investment types
- Low minimum investment to participate
- Great ability for diversification
- Opportunity to earn higher interest compared to local market
For borrowers:
- Opportunity to get a loan that the bank would not finance
- Small minimum loan sizes
- Faster funding compared to traditional loans
- Competetive interest rates, lower than banks loans.
Closing thoughts
Peer to peer lending is an exciting investment opportunity for new investors and is possible for large as well as smaller investors.
The crowdlending space is constantly growing and evolving and is an exciting space to be in while it is on the uprise.