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How Does Peer to Peer Lending Work For Investors

Peer to peer lending is also known as non-bank lending. However, p2p lending is about making loans and returning the loan repayments to the investors, similar to banks. It cuts out the middleman and makes lending and borrowing easy. The process of lending is carried out through peer to peer platforms, and these platforms aim to earn money by charging fees from borrowers and investors. If you are new to p2p lending and want to earn money through it, this guide will help you know how it works and how much you can earn.

How Does It Work?

With interest rates remaining low for several years, investors are looking for alternative ways to earn high rates of returns. That is why peer to peer lending has become very popular in a short time, and there is also a rapid increase in p2p platforms.

If you choose to become a peer to peer investor, you need to select a platform first. After choosing a platform, you have to create an account and deposit the amount you want to invest in. P2p platforms allow you to invest in personal loans or business loans, and now some platforms offer p2p bridging loan. Before investing in any loan, you have to decide three things including:

  • How much money do you want to invest? Typically, the minimum amount is around £1,000, but some platforms also allow you to invest small amounts.
  • The interest rate you want to receive. Be mindful that a higher interest rate will be a risk.
  • For how long do you want to invest your money? Investment is a long term commitment. You can earn more by investing for longer time periods.

Most often, the amount you invest is spread across a number of borrowers to minimize the risk of losing money.

How Much Can You Earn?

By investing in peer to peer loans, it is expected to earn between 2 to 6% depending on how long you want to lock your money and whom you are lending to. You can earn high returns if you invest for long and take more risk. The interest rate depends on the creditworthiness of the borrower. If you are willing to lend money to individuals or businesses with low credit scores, you can earn a more competitive interest rate. Keep in mind that borrowers with poor credit ratings carry a high risk of default. However, if you understand peer to peer lending and take necessary measures to mitigate risks, you can even earn a double-digit annual return.

If you are considering using a p2p platform, you should keep in mind that you may lose some or all of your investment. There is no safety net by Financial Services Compensation scheme. However, some platforms have contingency funds to provide cover in case any borrowers default. There is also a chance that the peer to peer lending platform goes bust. Therefore, you should shop around and choose a well-reputed platform. Moreover, it is better to choose a platform that is regulated and authorized by the Financial Conduct Authority.

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