P2P investing - how to make money by lending to other people
P2P investing is a fast-growing investment option for all investors in Europe. Get to know best peer-to-peer investing sites and start invest in P2P today!
Since time immemorial, lending money for interest has been one of the most popular ways of "employing" your own funds. In the age of modern technology, the whole process of lending money has become much simpler and safer. P2P investing, which is rapidly gaining popularity around the world, makes it possible to lend your savings profitably, quickly and safely. P2P investing has quickly become popular among ordinary people and small investors due to its relatively low yields and high accessibility. So, let's take a closer look at this investment method and discuss P2P investment meaning, risks and returns.
What is P2P investing and how does it work?
P2P or peer-to-peer investing is the investment of money in consumer loans issued to individuals. These loans can be used not only to meet an individual's consumption needs but also to finance a business. Under current law, consumer loans can only be granted to natural persons, so if you choose this type of investment, you will be lending money to other people. It should be known that consumer loans are granted without any collateral and that the role of collateral is played by the customer and his/her ability to generate a steady income. For this reason, investing in P2P loans are generally more profitable than investing in loans with collateral.
Thus, investment in loans takes place on dedicated P2P lending platforms, which can be said to act as an intermediary between the investors and the people looking for a loan. In order to obtain a loan, customers have to fill in a special loan application and submit it to the administration of the P2P platform. After receiving the application, the platform assesses the client's risk and repayment capacity and, depending on the results of the assessment, approves or rejects the application. All approved applications are submitted to the platform's registered investors, who select the most suitable loans and fund them. Once the loan is fully funded, all that is left for the applicant to do is to sign the loan agreement.
Main types of P2P investment in Europe
Looking at the activity of the best P2P investment platforms operating in Europe, it can be seen that the majority of players in this market offer investments in consumer loans or business loans. Although it is sometimes possible to invest in such loans on the same platforms, it should be said that these are different investment instruments. In fact, these loans have different yields, risks and other important indicators that sometimes play a key role in investment decisions. For this reason, it is appropriate to discuss these different areas of P2P investing in more detail.
Consumer loans to ordinary people are probably the most common area of P2P investment. These types of loans are designed to finance people's consumption needs and other expenses. Consumer loans are generally not of high value and usually do not exceed €5-10,000. The loans are granted without collateral and therefore carry a higher interest rate than loans with collateral. In other words, consumer loans are generally more profitable than secured loans, but they are also riskier. Loans are repaid in instalments with monthly payments, so you can enjoy your earnings every month.
Most investment platforms also allow you to invest in loans to finance your business. Such loans are usually applied for by small business owners who are short of working capital. However, business loans can also be issued to finance new business projects or ideas. As a rule, business loans tend to be of a higher value than ordinary consumer loans and, in some cases, can exceed EUR 200 000. Smaller loans require a personal guarantee from the business owner, while larger loans are secured by collateral. Due to the collateral used, business loans are considered less risky than consumer loans, so your investment will be safer if you choose this P2P investment route. On the other hand, the lower investment risk directly translates into a lower return on investment.
Is it really worth investing your money in loans?
P2P investing is still a relatively new way of "recruiting" money, and many people are still getting to know it. However, the solid returns and simplicity of P2P lending are attracting new investors every day. Because loans can be invested with very small amounts of money, P2P investing is accessible even to people with very small savings. So, in order to put your savings to work and get a closer look at investing, it is definitely worth putting some of your money into P2P investing.