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Peer to peer lending matches potential borrowers directly to the investors who are willing to finance loans. It is relatively a new approach in lending and borrowing that cuts traditional financial institutions like banks. Through this lending, borrowers can get quick funding, and lenders can earn a healthy return. Peer to peer lending platforms offer loans to individuals and businesses. In the beginning, they only offered unsecured consumer loans, but with the popularity and increasing demand of p2p loans, platforms expanded in types of loans. Many platforms also offer p2p property loans, also known as short term bridging loans that are used for purchasing a property or refurbishment of the property.

Borrowers can apply for loans through online peer to peer platforms, while lenders can choose the loans they want to invest in. You can invest in single or multiple loans. Let’s explore more about p2p lending to know how it works and if it may make sense for your investing and borrowing goals.

How P2p Lending Works?

Peer to peer lending is carried out through online platforms that connect lenders with potential borrowers. The features vary from platform to platform, so you should compare different platforms so that you can choose the best one. After choosing a platform as an investor, you need to make an account and deposit the funds you want to invest. You can select your lending criteria and interest rate that you would like to receive and start lending for a specific amount of time. On the other hand, if you want to borrow money from p2p platforms, you have to fill an application form and provide all the necessary information such as your income source, credit score, address, how much you want to borrow and for how long. After checking your creditworthiness, the platform will approve your application. You will get quick access to funds and use them to fulfil your financial needs.

Is P2p Lending Safe?

Peer to peer lending offers high interest rates to lenders that make it an attractive investment. But like all other investments, it also has some risks that you must keep in mind before investing. The major risk while investing in p2p loans is the risk of borrower default. If a borrower defaults on unsecured loans, you may lose all your money. If your loan is repaid early or late, you may earn less profit than what you expected to earn. Another risk in this type of lending is that the p2p lending platform may go out of business.

What Fees Do P2p Lenders Charge?

P2p lending platforms earn by charging fees from both lenders and investors. Therefore, it is essential to know the terms before getting a loan as a borrower or handing over your investment to a platform. There are various types of fees charged by lenders. For example, investor service fees are taken from investors that are usually 1% of the total amount they received from the loan’s payment. Suppose you are a borrower. You have to pay more fees, including the origination fee, administration fee and early or late repayment fees. You should add these fees to your loan cost before taking a p2p loan.

Uses of P2p Loans

Most peer to peer platforms offer unsecured loans that a borrower can use nearly for any purpose. However, you have to tell the intended purpose of the loan before getting a loan. Typically, these loans are used for home improvement, car repairs, payment of utility or medical bills, and major purchases. In addition, P2p bridging loan are used to bridge the gap when long-term funds become available and usually used to complete the purchase of a property or renovate a property to increase its value before the sale.

Now that you know all the necessary things about p2p lending, you can decide whether it suits your financial goals or not.

 In order to mitigate the risks, you need to select a well-reputed and trusted platform and spread your investment across different loans. When you spread investment in multiple loans, the chances of losing money. This is because even if one borrower defaults, you can get profit from the other loans. If you take proper measures to reduce risk, you can get double-digit returns per annum and can make peer to peer lending your passive income source.