Peer-to-peer lending: What you should know before you invest
You’re familiar with crowdfunding, right? An individual looks to fund a project online by raising money from as many donors as possible, all of whom chip in varying amounts until the target is reached.
Well, peer to peer (P2P) lending works in a similar way.
Borrowers want low-interest loans, and apply online with P2P lending platforms. Once they’ve been approved, investors (lenders) can fund the loan and profit from the interest the borrower pays to secure their capital.
At the end of the fixed term, the lender gets back the principal (original investment) and a tidy profit, with many lending platforms offering better returns than traditional investment products (and considerably more than banks).
As for the borrower, all being well, the collateral (more on that later) they’ve used to help secure their loan is returned to them.
But why invest in P2P lending, rather than your bank?
Here are two good reasons:
1: You’re in control of your investment
One word: freedom.There’s no middlemen looking to take their cut; there’s no paperwork slowing down the process; it’s just you and the borrower — the lending platform merely facilitates ‘the meet.’
Depending on the platform, the lender can set their own interest rate too, which is then matched to a suitable candidate, making the process that bit more convenient. Constant even has its own order book so you can cherry-pick the best deals instead of waiting for a match.
This is empowering! It means you can gain more of an insight into the P2P market as well as make an informed decision on when to invest.
2: P2P Lending is Flexible
Instead of investing in one loan, P2P platforms allow lenders to spread their holdings across multiple loans in the form of “notes”. We go one step further. You can choose the amount, interest rate, and term of your investment — and we’ll match you with someone willing to borrow on your terms. This gives you total control over your lending.
Here’s how lenders make a profit…
- P2P Lending platforms will often categorize borrowers as low risk, medium risk, and high risk — with interest rates that reflect this. Constant, on the other hand, doesn’t have to — all loans are over-collateralized, meaning borrowers put up 150% of the loan amount in collateral to secure the loan.
- That means interest rates go as high as 10% (as of 7 Jan 2020, the market rate is 8%), sometimes even higher, without the lender worrying about calculating risk for each loan.
- If a borrower defaults, we sell the collateral to repay the lender. The same applies if their collateral falls in value too much.
Lenders can get an annual return in the region of 10% (as of 7 Jan 2020, the Flex rate is 4%), which compares favorably with traditional products like savings accounts and CDs.
Sounds good, but what are the risks with P2P Lending?
There’s an element of risk attached to all investment opportunities, and here are two things you should consider.
First, the temptation to chase high risk loans for high returns could leave you out of pocket, especially on a platform that’s very user-friendly. That’s why diversifying your holdings is key.
Second, borrowers often favor P2P lending platforms because they can get a loan without needing a good credit history. They typically use cryptocurrencies like Bitcoin as collateral to secure the loan, rather than more tangible assets like a home or a business — which require a higher credit rating. But crypto can be volatile, and if the market crashes quickly and severely (known as a flash crash) you could lose some or all of your investment.
It’s important to shop around and find a P2P lending platform that offers you the best security on your investment. You might want to give us a try. As one of the few fully-secured P2P lending platforms, Constant secures your loans with borrower collateral — 150% of the loan amount in fact. If borrowers default or their collateral loses value, it’s sold to repay you.
Few other lending platforms offer that level of security.
Removing all that red tape is a definite advantage with P2P lending, and although the default risk can be quite high, you can mitigate for this by diversifying your holdings across multiple loans to minimize losses, or in our case, we’ll ensure your borrower has over-collateralized their loan to protect your investment.
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