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What is P2P Lending?

Are you interested in earning money online through P2P lending? Learn how it works in this comprehensive guide!


P2P Lending Explained

P2P (peer-to-peer) lending is a popular way to earn money online by investing in loans that are borrowed by people or businesses. In this guide, we’ll explain what P2P lending is, and the range of P2P lending business models available for investors like you to invest in.

How Does P2P Lending Work?

Traditionally, if a borrower needed a loan, they would have gone to the bank, which would have assessed the credit risk and either accepted or declined the application. This procedure would have taken several days or even weeks, and requires a lot of paperwork.

traditional lending

Thanks to modern technologies, borrowers can now take a loan out online, from a non-banking lending company, within only a few minutes.

In some countries, banks are the only institutions that lend money, while in other countries, this isn’t the case, and anyone with a lending license can lend money to borrowers in exchange for interest. We call these companies ‘alternative lenders’.

alternative lending

Where Does the ‘Alternative’ Lending Company Get Money?

In order to finance loans, the lender needs funding.

Banks typically take money from the savings accounts of those banking with them, and invest it in loans. The interest from the loans is then shared between investors and the bank itself, and that small amount of interest you see in your savings account each month is your share of it.

So, because banking is such a common way of storing money, banks have constant access to massive amounts of money, but lending companies don’t have the same access to funds.

Well then, where exactly does the lending company get their money from? That’s where P2P lending comes in.

p2p lending definition

Here’s how P2P lending works:

  1. A group of investors lend money to borrowers through a lending company
  2. The lending company distributes the investor’s investments and the investor receives a ‘claim against the borrower’
  3. The borrower pays back the loan principal as well as the interest to the lending company
  4. The lending company takes commission from the transaction and transfers the remaining money back to the investor

Can you see how this is similar to banking? Just replace the bank with a lending company!

Many investors refer to P2P lending also as P2P investing or crowd-investing.

How Much Money Can You Make as a P2P Investor?

By investing in P2P loans you can make an average of 10% per year.

Note that your returns are influenced by many factors, which is why you should study our P2P lending academy to ensure you’re aware of all the details.

One very important factor that has an impact on the safety of your investments as well as your returns is the P2P lending business model.

5 Different P2P Lending Models

When we talk about P2P lending, we imagine a group of investors investing in loans.

That’s correct, however, there are different subcategories or ‘business models’ within P2P lending that you should be aware of, since these influence the safety as well as the return of your P2P investments.

Here's a quick overview:

1. Investing on P2P Platforms

Lending companies that lend money to borrowers launch a website that connects investors like you directly with borrowers. This website is also called a P2P platform.

p2p platform definition

How P2P Platforms Work:

  1. You invest on a P2P platform which is also the loan originator (lending company)
  2. The lending company lends money to its borrowers
  3. The borrower returns the loan and additional interest to the lending company
  4. The lending company deducts a fee and transfers the rest back to your investor account

Key Takeaways

  • When using P2P platforms, you invest directly in loans from borrowers
  • You know more about the borrowers’ financial situations
  • The lending company does its own credit check of the borrowers
  • The lending company is in charge of debt collection

Pros of Investing on P2P Platforms

  • You know exactly where you invest your money into
  • Less risk as lending companies have direct access to the borrower
  • P2P platforms are more transparent

Cons of Investing on P2P Platforms

  • There aren’t always enough investment opportunities that match your preferences
  • The diversification of your portfolio is limited
  • Many of the available loans are unsecured

P2P Platforms You can Invest On

P2P PlatformAverage Interest
NEO Finance18%
VIAINVEST12%
TWINO11%
Bondora10.5%
Robocash11.36%
Swaper12%
Lendermarket14%

2. Investing on P2P Marketplaces

The lending company doesn’t create its own P2P platform but lists its loans on P2P marketplaces that simultaneously list loans from multiple lending companies. These companies are called ‘loan originators’.

p2p marketplace definition

How P2P Marketplaces Work:

  1. You invest your money on a P2P marketplace
  2. The P2P marketplace sends the money to the loan originator
  3. The loan originator lends the money to the borrower
  4. The borrower returns the money with additional interest to the loan originator
  5. The loan originator transfers the funds back to the P2P marketplace
  6. The P2P marketplace deducts a fee and adds the funds back to your investor account

Key Takeaways

  • You can invest in multiple loan originators
  • The P2P marketplace monitors the performance of its loan originators
  • You have almost no information about the borrower
  • Investing on P2P marketplaces is the most popular form of P2P lending

Pros of Investing on P2P Marketplaces

  • Your investment is secured by a buyback guarantee
  • You can create a broadly diversified P2P portfolio
  • There are more investments available here than there are t

Cons of Investing on P2P Marketplaces

  • The platforms’ assessments of their loan originators are not always accurate
  • P2P marketplaces rely financially on their loan originators
  • Most of the loans are unsecured consumer loans

Where You Can Invest on P2P Marketplaces

P2P MarketplaceAverage Interest
PeerBerry12.9%
Viventor13.6%
Iuvo Group9.2%
Mintos12.08%

3. Investing on P2B Platforms

P2B platforms are lending companies that lend money to businesses rather than private individuals. The main difference between P2P lending and P2B (peer-to-business) lending is that business loans are usually protected by a mortgage or other business collateral and personal guarantees.

p2b platform definition

How P2B Platforms Work:

  1. You invest on a P2B platform which is also the loan originator (lending company)
  2. The P2P marketplace sends the money to the loan originator
  3. The lending company lends money to the business which provides collateral for its loan
  4. The business returns the loan with the additional interest to the P2B platform
  5. The P2B platform deducts a fee and the rest goes to your investor account

Key Takeaways

  • Your investment is protected by collateral
  • These loans are more suitable for experienced investors
  • You invest in businesses that create value
  • Your investment term is longer

Pros of Investing on P2B Platforms

  • Your money is often protected by a mortgage
  • The potential return from your P2B investment is higher

Cons of Investing on P2B Platforms

  • The minimum investment amount is higher
  • This business model is popular amongst scammers
  • There are big differences between individual P2B platforms
  • Some P2B platforms are less transparent than their P2P counterparts

Where You Can Invest On P2B Platforms

P2B PlatformAverage Interest
EstateGuru11.86%
Crowdestate17.13%
Crowdestor15.1%
FinBee12.08%
Flender9.9%
Wisefund18.32%
Bulkestate14.75%
Nordstreet11.5%

4. Investing on P2B Marketplaces

P2B marketplaces list loans from loan originators that fund business loans only. The only difference to P2P marketplaces is that the borrower isn’t a private individual, but instead a company.

p2b marketplace definition

How P2B Marketplaces Work

  1. You invest your money on a P2B marketplace
  2. The P2P marketplace sends the money to the loan originator
  3. The P2P marketplace sends the money to the loan originator
  4. The loan originator lends the money to the business
  5. The business returns the money with additional interest
  6. The loan originator transfers the funds back to the P2B marketplace
  7. The P2B marketplace deducts a fee and adds the funds back to your investor account

Key Takeaways

  • Your investment is protected by collateral
  • Suitable for more advanced investors
  • Limited diversification as the availability of loans is lower
  • The P2B marketplace monitors the performance of its loan originators

Pros of Using a P2B Marketplace

  • Your money is protected by collateral
  • Higher monitoring quality compared to P2P marketplaces
  • The minimum investment is only €10

Cons of Using a P2B Marketplace

  • The returns are usually lower
  • This business model is popular amongst scammers
  • There aren’t many P2B marketplaces to choose from
  • You don’t have instant access to your money

Where You Can Invest On P2B Marketplaces

P2P PlatformAverage Interest
Debitum Network8.44%

5. Investing in REITs

REITs (real estate investment trusts) are real estate companies that own and manage properties like office spaces, apartments, or warehouses that generate regular rental income.

You can, therefore, invest in apartments and receive a monthly income without all the risk, management, and time spent buying and managing a property.

You can track rental prices on websites like abodo.com which gives you a good idea about the return of your investment in case you're investing in U.S. based REITS.

reit definition

How REITs Work

  1. You invest money into property on a real estate platform
  2. After the funding target is reached, the REIT purchases the property and rents it out to tenants
  3. The tenants transfer their monthly rent to the REIT
  4. The REIT pays out the monthly rent back to your investor account

If the REIT sells the property at a higher price, you will receive higher returns from the capital gain.

Key Takeaways

  • You receive monthly income l
  • Suitable for more advanced investors
  • Your investment is secured by a mortgage
  • Your investment term is between 12 and 48 months
  • Investing in REITs is rather unexplored by European investors

Pros of Investing on REITs

  • Monthly cash flow
  • Investments are well secured
  • This kind of investment is suitable for more advanced investors

Cons of Investing on REITs

  • No early exit from your investments
  • Lower returns
  • The total return dependents on market volatility
  • No cash flow if the property remains without a tenant

Where You Can Invest in REITS

P2P PlatformAverage Interest
Reinvest2414.6%
Brickstarter5.5%
EvoEstate13.11%

Which P2P Lending Business Model is Best?

Choosing the best lending business model is personal, and it comes down to your investment goals and how risky an investment you’re prepared to make.

p2p lending types

  • If you’re just starting out with this kind of investing, a P2P marketplace is going to be the best fit for you
  • If you want to diversify your portfolio, joining a P2P platform with a long-lasting track record is a solid approach
  • To bring more safety to your P2P lending portfolio, invest in P2B loans that are backed by a mortgage
  • If you chase the highest returns and don’t care about transparency, you can also invest in business loans that aren’t protected by a mortgage. This does, however, come with a certain risk

Keep in mind that the higher the returns, the riskier the investment.

⚠️ Avoid these 6 P2P Lending Mistakes

Before you start earning money by signing up and investing on one of the suggested platforms, read our P2P lending guides to get familiar with P2P lending.

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