Think about how you spend your money:
What you buy, and what you get in return.
That’s money that could be loaned – and paid back with interest.
At its core, a P2P loan is exactly what the phrase suggests: people bypassing institutions and lending money to each other.
Why? Because people need money for all sorts of things: businesses, cars, travel, houses, and a lot more. That’s why there are different types of P2P lending, and therefore, several opportunities for you to invest in the P2P lending world.
What are the main types of P2P loans?
There are 5 types of P2P loans – unsecured, secured, property, SME business and car leasing.
Let’s take a look at each loan in more detail.
1. Unsecured consumer loans
Unsecured peer to peer loans are personal loans that don’t involve any collateral – collateral being other assets that can be repossessed in case the borrower does not pay back, such as a car, business or house.
Since the risk is higher, the credit application is designed to pick borrowers who can pay back their loans, and credit scores are usually higher than 600.
Due to the nature of unsecured loans, loan originators can make a much higher return – often as much as 200%.
These higher returns mean originators often have leftover funds which they can use to compensate investors and protect against defaulting.
It’s one of the reasons why unsecured lending is often more popular than secured loans.
For example, Swaper’s P2P loans come with buyback. If a borrower is late on repayment of the principal amount or interest, the loan is bought back and investors can get full compensation along with any interest.
2. Secured consumer loans
Secured consumer loans do involve loans that have collateral, typically a property, car or a business. The loans will be of higher value and will have better terms, but the interest rates will be lower.
The benefit of investing in secured loans is that borrowers are more likely to pay back. However, there are strict consequences (i.e., house repossession), so it’s a good motivation factor to pay the loan back in full.
That being said, there are a few risks that come with secured consumer loans.
For example, mortgage fraud (such as overvaluing a property) or a downturn in the real estate market could mean if the borrower defaults, the collateral is not worth as much as expected. This may leave investors with huge losses.
3. Property loans
Property loans are a very specific type of P2P loan that is tied to the principal fund to the purchase or development of property. Property-secured P2P lending makes up the third largest volume within the alternative finance industry.
But this type of P2P investment carries a higher level of risk.
That’s because it is associated with just one sector. For example, if there is a housing market downturn or crash, your portfolio is more likely to take a hit.
This leads to a greater chance of defaults, too. Due to the nature and size of P2P property loans, there is a lower chance of the lending platform offering a buy back.
That’s why property P2P loans are often riskier than some other types of P2P loans.
4. SME Business lending
SME Business lending refers to the peer to peer funding of businesses.
With banks issuing fewer loans and revenue drying up, many small businesses are having to look elsewhere for funding – in the UK, nearly a fifth of SMEs are considering a P2P loan application within the next twelve months.
SME loans are typically unsecured and rely on the growth of the business. For this reason, applications usually place emphasis on a strategy or development plan prior to approval. Many loan originators will have business analysts on their panels in order to reduce risk.
With SME peer to peer loans, investors can invest in several businesses at once, lowering the overall risk of investment and making it an attractive option.
5. Car leasing
Another segment of the P2P lending market is investing in car leasing, also called P2P car finance.
This type of investment allows investors to lend money directly to people who want to finance their vehicles.
Investments usually take place on a marketplace, matching lenders and borrowers. Just like any other loan, the borrower makes interest payments over time and the lender eventually receives their entire investment along with interest.
This kind of loan helps borrowers who are turned away from traditional lenders or don’t want to pay high APRs in order to own a car. Depending on the risk level of the borrower, lenders can enjoy returns of between 3% and 7% per year.
Which type of P2P loans should I invest in?
It’s important to note that most P2P investing companies offer unsecured consumer loans (including property and SME loans).
But not all loans are made equal, so choosing the right P2P lending option is important.
The P2P investing sector to invest in often comes down to technicalities: which investing asset offers the highest returns, the lowest required maintenance and a platform that works? Unless you are passionate about a specific sector, it really comes down to choosing the right P2P platform.
Here’s 3 steps to help investors choose the right platform:
- Research the company behind the platform, including the founders. The best place to start would be an “about” page on the website. A robust profile will help ensure that the company is legitimate.
- Try to find information on the history and track record of the P2P platform. While a good track record doesn’t guarantee your own returns, it should help confirm that the platform is legitimate. At Swaper, for example, we’ve returned over €3 million to our investors.
- Finally, open an account and see how the platform works. Is it easy to use? Easy to add funds? Are the fees transparent and can you manage your portfolio? If you’re happy with the platform and the returns they offer, then it’s a sign that that’s the one to pick
When you start investing, it can be confusing to know how each P2P loan differs.
Understanding what you can invest in allows you to diversify your portfolio, while taking advantage of the higher returns that come with P2P loans.
At Swaper, we focus on offering an easy to use, intuitive platform that provides investors a 14% return – and 16% with our bonus
Ready to give Swaper a try?