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What is Peer-to-Peer Lending?

What is Peer-to-Peer Lending?

Last Update: / by Marco Schwartz

I love investing in passive income-producing assets, as not only it allows me to get income coming in every month, but also allows me to build a solid portfolio of assets that will grow over the years. In this article, I want to tell you more about one type of passive income-generating asset, which is called Peer-to-Peer lending.

We are going to see what Peer-to-Peer lending is exactly, and how it can help you build a solid investment portfolio that generates passive income every month. We are first going to talk about money lending in general, and then dive into Peer-to-Peer lending in particular. Then, we’ll see why it is a great asset class and worth investing your money, and finally, I'll tell you what are some of my favorite Peer-to-Peer lending platforms so you can get started right away if you wish to. Let's start!

Traditional Money Lending

For most of human history, people always made money by lending to one another. However, at the start, there were not so many ways to borrow money when you needed it. The first way was, of course, to ask somebody to lend you money, in exchange for the promise that you will repay this person later. Of course, as the lender (the investor), this is a very risky way to invest your money: you have no guarantee at all that the other person will repay you back, even if it’s with friends or family.

Then later came banks. Banks are the usual place where you would go to get a loan, to finance small projects like a new computer to larger acquisitions like a flat or a house. However, for a borrower, the process can be fastidious, as a bank usually want a lot of guarantees before giving you any money. Therefore, a lot of people were excluded from this system because they don’t meet the criteria given by banks. Also, there is no place for investors in this scheme, as the bank is lending the money to the borrower. So for a long period of time, banks were completely in control of most of the lending market, and it was impossible for an individual investor to generate returns by lending to someone else, except by taking great risks.

The Rise of Peer-to-Peer Lending

More and more borrowers grew tired of using banks to get money for their projects, and there was a real demand for something new. People wanted a simple, fast, and reliable way to borrow money without going through a bank. This is when Peer-to-Peer lending was born.

Indeed, with the Internet, it was possible to directly put in contact borrowers with lenders through online platforms. In 2006, Lending Club was created in the US and is still today one of the biggest online peer-to-peer lending platforms. Many other platforms followed, including in Europe, and because every platform needs lenders as well as borrowers, a brand new asset class was born.

Basically, as an investor in Peer-to-Peer lending, you are playing the role of the bank. You are lending your money directly to borrowers, in exchange for interest on the money that you are lending to them. The advantage of Peer-to-Peer lending compared to lending to friends or family is that you can diversify your investment over hundreds of loans from borrowers on a single platform, therefore greatly reducing your exposure to risk. Indeed, even if one or two persons don't pay you back, you're overall returns won't be affected that much.

Why is it Great to Invest in Peer-to-Peer Lending?

There are many reasons why Peer-to-Peer lending is a great way to invest your money. This can be the topic of an article of its own, but I wanted to quickly list some of those reasons here. First, you can get great investment returns using Peer-to-Peer lending. It’s not unusual to get double-digit returns on your investment. For example, I am investing in a platform called Mintos on which I have an average 12% return on my investment using a very conservative strategy.

It’s also a nearly passive kind of investment. Indeed, on several platforms, you will find a portfolio manager, also called an auto-invest function, which will automatically invest according to your criteria. You still need to know how to define those criteria, but that’s what this website is for. You can, for example, find my current sets of investing criteria on my review of Mintos.

Peer-to-Peer Lending Platforms

To invest in Peer-to-Peer lending, you have to use Peer-to-Peer lending platforms, which basically put in relation borrowers and investors. They usually propose extra functions as well, like the auto-invest function I was mentioning before, or secondary markets, which allow investors to sell their loans to other investors if needed. There are usually platforms in every country in the world, but as a European investor I mainly invest in European platforms, so you will mostly hear about European Peer-to-Peer lending platforms on this website. If you want to learn more and know how to select the best platforms for your Peer-to-Peer lending investments, I recommend reading my article about choosing a good Peer-to-Peer lending platform.

I hope you enjoyed reading this introduction to Peer-to-Peer lending! If you have any questions or comments, please share them below!

Learn How to Invest in Peer-to-Peer Lending!
Investing in Peer-to-Peer lending is a great way to create a passive income generating portfolio using your hard earned money. That's why I created a simple checklist that I personally use to select the best Peer-to-Peer lending platforms & loans. Simply click on the button below to get it for free!

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