Peer to Peer (P2P)Lending: Definition, Types, Platforms

Investors and borrowers are shifting to peer to peer lending now more than ever. This is largely thanks to its flexibility and potential for steady, sizable returns. However, there are many types of peer to peer lending so it’s useful to understand the basics before you invest for the first time.

Defining peer to peer lending

Is P2P lending a good investment?

Here’s what P2P lending is at its core: Instead of borrowing from a financial institution like a bank, P2P lending platforms facilitate loans directly between borrowers and lenders.

A British company called Zopa first introduced the world to peer-to-peer lending back in 2005. Just one year later, P2P lending had made its way to the United States with Prosper, but didn’t become popular until after the 2008 financial crisis.

After losing trust in traditional markets, investors who wanted a new source of steady income migrated to P2P lending to diversify their portfolios while borrowers flocked for the low interest loans.

P2P lending has expanded globally since its debut in 2005, particularly in countries with strong financial markets like the US, UK, EU, and China. According to Business Insider, the United States leads the P2P market by volume, but the United Kingdom leads on a per capita basis.

So is P2P lending a good investment? Well, let’s take a look at the benefits of peer-to-peer lending on both sides.

P2P lending allows you to diversify your investments and secure steady and sustainable returns that exceed traditional low-risk options. Many platforms let you spread your risk exposure as well as letting you choose individual borrowers, contribute smaller amounts to multiple loans, or take out a portion of a larger loan.

P2P loans can be funded quickly with little paperwork or red tape. While some banks might take a month to pay your loan, some P2P lending platforms approve and credit your account in minutes. They’re also a great alternative if you have a low credit score. They often use different methods for accessing creditworthiness and might give you a better rate.

How to make money with different types of peer to peer lending?
How to make money with different types of peer to peer lending?
How to make money with different types of peer to peer lending? It’s all about diversification — putting your funds into different pots, or in peer-to-peer lending, different loans (source: techcrunch.com)

Types of peer to peer lending platforms

When P2P lending first became popular, its biggest selling point was fast loans for borrowers — especially if they didn’t qualify for loans from other financial institutions. If borrowers seemed untrustworthy, platforms would charge interest rates as high as 35% and throw them on the market.

The high rates quickly attracted investors who wanted significant returns on their investments for very little work.

These traditional P2P loans like those found on LendingClub or Prosper, however, are riskier for investors because they are usually uncollateralized. This means that if the borrower defaults there is no easy way for investors to get their money back.

This model can put investors at risk. In China, for example, the peer to peer lending industry has faced many challenges due to a lack of liquidity and poorly-vetted uncollateralized loans, forcing the peer to peer market to decline two-thirds in just one year.

As the peer to peer marketplace expands, new lending platforms are emerging to solve the uncollateralized loan problem.

On MyConstant we’ve developed a system of collateralized peer-to-peer loans to help protect investor interest and create more transparency online.

Most large loans are collateralized in some way. Collateralized loans require the borrower to put up an asset, like a house or a car, to secure the loan. In the event of default, this collateral is then seized by the lender and used to repay the debt.

However P2P platforms are often online and have limited resources for long legal battles to repossess cars or houses from delinquent borrowers.

Platforms like MyConstant instead use cryptocurrency for added flexibility for borrowers. Crypto is valuable, liquid, and has a bright future in the expanding realm of fintech.

Besides collateral-backed platforms, a growing number of P2P lending platforms are switching to a crowdlending model.

In crowdlending, investors and borrowers are pooled together. Sometimes large groups of investor principal is combined to fund large loans or split among individuals.

This form of lending can be seen in the rise of loan originator platforms, where investor funds are lent out to loan originators that then distribute funds to borrowers themselves. Crowdlending helps to mitigate risks from borrower defaults because pools of funds can help lessen losses for all investors. Many consider this area the future of P2P lending.

And there’s some P2P platforms that combine a little bit of everything these days…

Since property and other illiquid assets can take years to sell, collateralized peer-to-peer lending platforms work better
Since property and other illiquid assets can take years to sell, collateralized peer-to-peer lending platforms work better
Since property and other illiquid assets can take years to sell, collateralized peer-to-peer lending platforms work better with liquid assets like cryptocurrencies (source: p2pempire.com)

Get great rates, instant matches, and 24/7 customer service all on one P2P platform

On MyConstant, you can use USD or cryptocurrency for loans and investments. All loans are collateralized, so are less risky than unsecured loans.

And as an investor, you can earn between 4–9% on steady fixed-rate loans.

MyConstant makes it easy to invest your money in peer-to-peer lending in a few different ways with very low risk
MyConstant makes it easy to invest your money in peer-to-peer lending in a few different ways with very low risk
MyConstant makes it easy to invest your money in peer-to-peer lending in a few different ways with very low risk

We offer you three different ways to lend: Flex, Crypto-Backed, or Crypto-Lend.

MyConstant’s Flex account helps you earn through decentralized lending and liquidity pools. Once you deposit money into the account, MyConstant will lend to borrowers for you and you get to keep the interest as your return on investment. You don’t have to worry about any fees — including withdrawal fees — and get 4% APY compounded every second.

MyConstant crypto-backed loans connect you with crypto borrowers. Choose your rate and terms and get matched with a borrower instantly. All loans are collateralized, so there’s very little risk of default and you get up to 7% APR on a 6-month loan.

Put your cryptocurrency to use. Invest Bitcoin and other popular cryptocurrencies with MyConstant’s crypto lending product and earn up to 9% APY. Interest is compounded and paid every second, so you can always see your investment grow and withdraw at any time.

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Peer-to-peer lending built on peer-to-peer technology. Refer & Earn $10 myconstant.com/referral | Website myconstant.com

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