Are you tired of bank savings deposits that yield next to nothing on returns as a result of low interest rates? There is a growing revolution in practice that may put an end to this.
Thanks to Peer to Peer (P2P) lending, individuals may no longer have to rely entirely on traditional banks for their savings returns and similar investments.
What is peer to peer (P2P) lending?
P2P Lending, or social lending to some, is a practice that allows individuals borrow and lend money directly to each other. In much the same way eBay eliminate the need for middlemen between sellers and buyers, P2P lending companies like Prosper and Zopa remove the need for financial arbitrators such as credit unions and banks.
P2P lending services are the product of essential business, technology and growing social trends. With intelligent processes and algorithms developed over the years, P2P companies give individuals the same power as banks, thus enabling them provide even corporate loans.
How does it work?
Starting is easy. This is how it works:
1. Choose a P2P lending company that is suitable for you
All P2P companies offer the same services, but there are usually slight variations in the operating model. Typically, from your account you may pick the most popular service, Lending Club. It takes only a few minutes to register or apply for a loan. Most lending platforms will require your bank details, so it is advisable to have it close.
2. You will need to fund your account
It is advisable to start with a reasonable amount in the beginning, say £3,000. This amount allows you to spread your lending options over a wide range of borrowers. Note that you may decide to increase this amount at any time.
3. Set-up a maximum loan limit
If the total amount in your Lending Club Portfolio is £3,000, you could set a limit of £30 for each borrower. Now, this is a hypothetical situation. Therefore, you can only lend money to a maximum of 100 borrowers at a time. This gives you enough room for diversification and buffers any risk of defaulting loans.
4. Ensure you are protected
When it comes to making these changes to your business, you need to to ensure you have the proper protection in place for peace of mind and to guarantee the safety of what you’re working on. A proper business insurance plan will cover you from any problems that might arise.
5. Decide who you want to lend to
Like banks, P2P networks have a set criteria for people eligible to borrow. These decisions are based on credit rating and other personal criteria. Borrowers are sorted in groups of A to G depending on their credibility with A being the highest and G the lowest.
Benefits of P2P Lending
- As a lender, you can enjoy high returns with percentage points higher than what is obtainable from banks.
- Eliminates the bureaucracy of the banking system
- Spreads risks easily for lenders
- It has a charitable side to it, especially for startup borrowers.
So, if your bank is giving you almost nothing in interest rates, you may want to consider some highly-rewarding percentage points from a P2P network.
