Peer to Peer lending or P2P, as it is also known, is an alternative form of investing that has been taking off in the UK since around 2005.
The reason for its success is that it cuts out the middle man, meaning that loans can become available for both individuals and companies that potentially have bad credit.
So, does that mean peer to peer lending is a high-risk investment? If that was the case, it wouldn’t have been so successful. As with all investment opportunities, there is an element of risk, but there are number of things in place to ensure the highest possible potential for a strong ROI.
The difference is simply that the way in which an individual’s risk is measured, changes. While banks will run a series of credit checks to determine if they are willing to lend you money, P2P lending platforms will do the same. The thing that changes is the way they do it.
This levitates a small opportunity for companies or individuals to possibly receive the go-ahead to operate or advertise their work on a peer to peer lending platform when they were unable to receive funding from traditional methods.
What is Peer to Peer Lending?
Peer to Peer lending is an alternative finance option that allows companies to receive monetary investments from individuals, rather than a bank. Many companies use peer to peer investment as a reliable option to fund projects at cheaper rates, often finding investors through specialised online p2p investment platforms and websites.
These lending platforms act as a go-between for lenders and investors. They make money through successful investments. The more successful investments that they help to match, the more people trust them, the more people use their service, the more money they make. It is therefore in an investment companies’ best interests to minimize risk and create successful opportunities for their users.
Why Lending to People with Bad Credit Can be Beneficial
The mistake that many people can make is thinking that only irresponsible people or unreliable individuals have bad credit ratings. In reality, even the most highly skilled professionals who have made a good living for themselves can have a bad credit score, success doesn’t automatically mean that banks are willing to lend you money.
We have all heard the stories of the numerous entrepreneurs and visionaries who failed multiple times before they were successful. The likes of Steve Jobs, Walt Disney, Oprah Winfrey and Fred Smith all became incredibly wealthy and successful, but only after failing miserably time and time again.
While the chances you invest in the next Steve Jobs is low, this is not completely out of context. Many successful business owners and CEO’s of companies have all had to fail in order to get things right. Peer to Peer lending gives them that opportunity.
Banks and other lending organisations don’t make big-picture decisions. They very rarely have margins that allow the loan assessor to think about the opportunity, it is all about the data.
This process gives lending platforms a unique chance to spot investment opportunities that others miss. As a result, they are slightly more risk inclined and will be happy to back your project if they think there is a chance it will have a strong turnaround.
P2P Lending Risks
This approach obviously opens both the increased chances for higher returns and higher risks. However, a number of P2P providers and investment companies will personally back loans with their own money, provision funds. This means that if the borrower defaults on a loan, they will repay you. While the amount will not always cover the entirety of your investment, it does add a layer of security and help to add confidence to your investing.
There are a number of other ways in which P2P platforms and investment companies protect their lenders, but there are also a number of ways you can protect yourself.
Overall, whether they have bad credit or good credit, investing in peer to peer can deliver predictable returns, however, make sure that you are aware of the risks. Spend plenty of time researching everything and asking questions.