What is Peer-to-Peer Lending?

What is Peer-to-Peer Lending?

Last Update: February 12th 2019 / by Marco Schwartz

In this first article on this website, we are going to talk about what Peer-to-Peer lending is exactly. 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 we’ll go over some well-established Peer-to-Peer lending platforms.

Traditional Money Lending

For most of human history, 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 of a promise that you will repay this person later. Of course, as the lender, 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 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 are no place for investors in this scheme, as the bank is lending the money to the borrower.

The Raise 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, and is still today one of the biggest online peer-to-peer lending platform. Many other platforms followed, and because every platform needs lenders as well as borrowers, a brand new asset class was born.

Basically, as an investor, you are playing the role of the bank. You are lending your money directly to borrowers, in exchange of an 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 on a platform, therefore reducing your exposure to risk.

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 will be the topic of another article, but I wanted to quickly list some of those reasons here. First, you can can get great investment returns using Peer-to-Peer lending. It’s not unusual to get double-digit returns on your investment. For example, platforms like Mintos have an average 12% return on your investment using a conservative strategy. You can of course get much more, but this comes with a higher risk on your money.

It’s also a nearly passive kind of investment. Indeed, on several platforms you will find a portfolio manager, 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 🙂

Peer-to-Peer Lending Platforms

Let’s now have a quick tour of the platforms available for Peer-to-Peer lending investors. I mainly know two groups of platforms: the US platforms because Peer-to-Peer lending started there, and the European platforms because that’s where I usually invest.

In the United States, you basically have two major platforms on which you can invest: Lending Club, and Prosper. However, these platforms are not available from outside of the US, so this is not something I could tell you more details about.

In Europe, you have access to many platforms as well, several of them which are only available in the local language of the country. However, I prefer platforms which are more opened to the European market rather than being focused on a given country. This is why I love platforms like Bondora or Mintos. You also have really good platforms in the UK like Saving Stream. Note that I also listed my favourite platforms on the Resources page of this website.

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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