Peer to peer lending is a popular alternative investment offering numerous benefits to investors and borrowers. In the beginning, the services of p2p platforms were limited, and they offered only consumer loans. But with the increasing popularity, the number of platforms, as well as their services, increased. Now you can invest in several types of peer to peer loans to create a diversified portfolio and earn maximum benefits. All the platforms operate online, offering flexibility and ease for lenders and borrowers. Here in this article, we are going to describe types of peer to peer loans and the reasons that help you understand why to invest in them.
Main Types Of P2p Loans
There are five major types of p2p loans, including secured loans, unsecured loans, property, business and car loans.
Let’s have a closer look at each of them:
Unsecured Consumer Loans
These are the most common types of loans and are usually known as personal loans that do not require any collateral. It means for borrowers, there is no risk of repossession in case of default. However, the risk for the lenders can be high in these types of loans. Platforms offer high-interest rates for unsecured loans to provide some security to the lenders. The platform provides contingency funds to cover investors in case of borrowers default.
Secured Consumer Loans
In this type of loan, borrowers have to use their valuable assets as a security against the loan. Secured loans have lower interest rates compared to unsecured ones. These loans carry fewer risks, and borrowers are more likely to repay the loan because there is a risk of repossession if they default. You should invest in secured loans in order to reduce the risk of borrowers’ default.
Peer to peer platforms offers business loans that are specially for startups and small businesses. Startups and SMEs find it challenging to secure loans from banks. That is why they look for alternative finance options to meet their obligations. P2p platforms offer an easy to meet eligibility criteria and grant quick access to funds. P2p business loans can be secured or unsecured. Businesses can take out a loan to overcome their cash flow problems, expand business or purchase new equipment. Investors can invest in different businesses at once to reduce risk and increase returns.
Another famous type of p2p loan is a property loan, also known as a p2p bridging loan. These loans are specifically designed for landlords, property investors, and developers. This type of loan is secured, and borrowers need to use their property as collateral against the loan. However, you can get quick access to funds as compared to traditional property loans or mortgages. Bridging finance providers also accept non-standard and uninhabitable properties that conventional lenders and banks do not accept. Chances of risk for investors are also low due to the security property.
It is not a popular p2p loan, but some platforms are offering car leasing, also known as car finance. This type of loan allows lenders to grant funds directly to individuals who want to finance their vehicles. Like other loans, p2p platforms match borrowers with the investors. Borrowers repay interest and loan amount in installments, and investors receive a return on investment. Borrowers can use this loan to purchase a new car or to repair their existing vehicle. As it is a secured loan, you can earn attractive returns without taking much risk.
In Which Type Of P2p Loan You should Invest?
It is essential to understand that most peer to peer lending UK platforms offers unsecured personal loans. You must always choose a platform offering a variety of loans so that you can create a diversified p2p portfolio. All the loans are not the same, and each of them carries its own risks and rewards. Therefore, it is essential to choose the right p2p loan. If you want to get the maximum returns from p2p investment, you must first select the right platform; otherwise, you have to face inconveniences later.
Here are some points that you should remember when hoisin a p2p platform:
- Do research to find whether the individuals behind the platform are experienced in finance or not. In order to get this information, you can go to the about section of a p2p platform and know who the founders are.
- Try to get information about the active loans, number of lenders, number of default loans, and track record. It helps you to know the performance of the platform. If the number of default loans is high, it is a red flag, and you should not choose to invest with this platform.
- Once you find all this information, create an account to know how that platform works. Find whether a platform is easy to use and is transparent in terms of fees and charges. If you are happy with the processes of the platform, you can start investing money to earn attractive returns.
When it comes to choosing a p2p loan to invest money, you should set your investment goals and choose loans according to these goals. Always keep in mind that the higher the interest rate, the more will be the risk of default. If you are ready to take risks, then you can invest in loans offering high-interest rates. But if you are not ready to take a risk or lose your money, you should invest in loans with low-interest rates. In addition, you should invest in secured loans like b2 bridging finance to reduce risks.
The best way to mitigate risks is to create a portfolio with a varied mix of loans and borrowers. This way, you can earn maximum returns without taking many risks.
No doubt peer to peer lending provides an excellent opportunity for investors to earn high-interest rates in this environment where traditional investments are offering low-interest rates. If you are a beginner, you may find it confusing to differentiate p2p loans. Take time to understand the process and difference in loans. Once you know which loans you should invest in, it will help you in creating a diversified portfolio and get the most out of your investment.