Peer to Peer lending

Peer 2 Peer lending (P2P) is a way to make cash by investing money and getting a return which can vary depending on the risk of what you are investing in. It works similar to crowdfunding in that a company or individual (known as a borrower) asks for a loan. Lots of individuals (known as lenders) lend them a portion of the loan with the understanding the borrower will pay them back the full amount plus interest.

Everyone benefits in this situation. The lender receives their money back plus interest, which is higher than any interest they will receive from a savings account. The borrower receives the loan at a lower interest rate than if they were dealing directly with a bank or loan company. The P2P company that arrange the loan make money by taking a small commission off the interest of every deal made.

You can get involved through a number of peer 2 peer lending platforms which are available online. Some allow you to invest in businesses that want to expand and offer the guarantee of a company director. Other loans are where the borrower will need to put up some form of asset to secure the loan against e.g jewellery or property. If the borrower then defaults on the loan, then the asset gets sold and the lender receives their money back. As with any investment there is an element of risk. The riskier loans pay a higher percentage of interest. If a loan defaults, which some do, the P2P platform will sell the asset or claim against the personal guarantee of the business owner to recover the debt. This may take some time. If the P2P company go into administration, as some have in the past, the loan is still valid being secured with the borrower so the lender should still be able to retrieve their funds. RateSetter is a good platform with an excellent track record that allows you to invest with borrowers who want the funds for business growth, personal loans and business loans.

Top Tip

As with any investment it always pays to diversify. Don’t simply offer your entire life savings in one loan secured against a property with a high rate of return. Sometimes loans do default and it can take a while to recover the funds. These are generally the exception rather than the rule but it does happen. As long as you diversify your investment portfolio you can offset the risk against any loss of capital.

Other than making money from Peer 2 Peer lending, it is also a great way to raise capital for an investment, business or project at a lower interest rate than you would receive directly from the bank. In essence by being the borrower instead of a lender

Sites to use

RateSetter – Get £100 bonus if you invest £1000