01/01/2022 update
OK, its been a while since this article was published originally, a couple of updates.
In the UK there have been a few of these companies that have had financial difficulties. An indication of the risks with some of these types of companies.
A couple of companies I invested in used to average from 6% to 8% return, this has been dropping to around 3 to 4%. This is still better than a bank account but again its a sign of a much tougher market out there.
Anyway, quick update this is still a good option but to stress again – there are some risks
What is P2P lending?
P2P or peer-to-peer lending is a system of lending and borrowing for individuals and businesses without banks, there are various service providers online that act as intermediaries for lenders and borrowers. The service providers being online can generally offer services at lower cost than banks.
From an investment point of view the rates of interest tend to be much higher than offered by traditional high street banks for the investor, also its easy to lend your money to multiple different borrowers which helps you diversify your investment portfolio and reduces the risks.
Secured loans are sometimes offered by using assets such as jewelry, watches, cars, art, buildings, aircraft and other business assets. They are made to an individual, company or charity. Other forms of peer-to-peer lending include student loans, commercial and real estate loans, payday loans, as well as secured business loans
The P2P sites work in different ways, I will explain some of the features here.
Some companies will do all of the work for you : You choose a plan with a set rate of return, invest your money and then they will invest the money for you to suitable borrowers. Usually there are a couple of plans, a low risk plan with lower interest and a higher rate plan with a greater return.
There are also some P2P sites who will grade the borrower and assign them to a category, so a category A borrower may payout 5% and is low risk, a category F borrower may be 12% and is a high risk investment. They will verify the identity of the borrower including bank details, employment status and income.
THE P2P lending company will perform credit checks and filter out borrowers that fail these. All payment processing is done by the company who take the money from the borrower and pass the required amounts on to the various lenders. All customer service is done by the P2P company and any debts will attempted to be collected the company. The company will also try and get new lenders and borrowers.
Lender Requirements
Usually there is minimum investmnet requirement, this can start at £500 with a few UK companies. I find this a nice amount just to test a site out.
You will obviously need a bank account in the P2P country.
P2P risks
There are some risks, it would wrong to not mention these.
If a borrower defaults you could lose your investment, some companies have protection in place but there is no official fincanial protection in place
If a borrower pays the loan back earlier then you may get a lower return than you expected.
Its not common but the P2P company could go bust – stick with a big established company.
About the companies
There are many companies in the P2P business, once you sign up you can see all of the businesses and people who are looking for investments.There are many more than our small selection we will be reviewing ones that we use. I would advise checking reviews of these sites independently.
Here are some of the key players in the UK
Fundingcircle : a huge player in the UK, 2 options to choose from conservative or balanced. They do all the work for you
Assetz capital : Another platform that makes life easy for you, pick a plan and they invest your money
Moneything : This platform has many borrowers but you have to manually invest, this takes a bit more time
Some US companies
The Lending Club : A huge US based company, you can earn about 3 to 8% interest
Prosper : Another huge site who average a 5.5% return
There are companies all over the world, I have been looking at some European based ones that look interesting. I restrict my investment to a maximum per company and use multiple companies
Summary
I usually invest in businesses and avoid individual borrowers, these tend to be higher risk. The main risk is that the borrower defaults on the loan and you lose your money.
I have found little risk but I target companies that do the bulk of the work for you with simple, easy to use websites and allow you to simply choose a plan, I have found that manually checking out loans is time consuming although technically you could target higher interest loans.
To earn big passive income from P2P lending you need a big investment to start with but pick the correct company its little effort.