Lean Martin's Blog

Peer to Peer Lending: What You Need to Know

Peer to peer lending also known as [url=https://personalloan.co/peer-to-peer-lending/]p2p lending[/url] is a type of lending that happens when an individual lends to a business or another person. The lender, in this case, gets an interest and the principal amount paid back after the lapse of the agreed time. This type of lending comes with a lot of risks more than through a bank savings account. This is especially because the process is not streamlined like that of a banking institution.
[font="Calibri Light", sans-serif]Today, there are various p2p websites that facilitate this type of lending. They operate like the marketplace, bringing businesses and people together to lend money to each other based on their preference. This is one of the ways borrowers can use to [/font][url=https://www.thebalancesmb.com/getting-a-personal-loan-online-without-a-bank-985112]get loans without necessarily going to the banks[/url][font="Calibri Light", sans-serif]. For some websites, money lent out is directly dived between various borrowers. Others decide on whom to lend their money. That is how it works out there. Those considered risky to lend to will be forced to pay high rates of interest on the money they have borrowed.[/font]
[b]Peer to Peer Lending Basics[/b]
[font="Calibri Light", sans-serif]To get started with p2p lending, here are the basics. It all starts with making a comparison of the available p2p lenders and go with the one you are comfortable with. Here are 3 key steps to follow:[/font]
[ul][li][b]Step 1: [/b]Open an account with your chosen p2p lender and make some payment in through either a credit or a debit card transfer[/li][li][b]Step 2: [/b]Set the interest rate you want to get or choose one that has already been offered[/li][li][b]Step 3: [/b]Lend a sum of money for a given duration. It could be 3 or 5 years. You may be required to pay some fee to lend your money out, say 1% of the loan you issue out. [/li][/ul]
[/ul] [font="Calibri Light", sans-serif]Some lenders get an “[/font]autobid[font="Calibri Light", sans-serif]” feature, which means you can peg limits on the amount of money you want to lend out to each borrower and the minimum interest rate you are willing to lend at.[/font]
[b]Risks Involved in P2P Lending[/b]
[font="Calibri Light", sans-serif]There are a lot of risks involved in this type of lending, not like in the conventional baking set up. Therefore, it is important for you to understand them and see how you can minimize them. Here they are: [/font]
[ul][li][b]Default Risks: [/b]sometimes, the borrower may not be in a position to repay the loan and the interest accrued. This is known as default. If the default rate is high on a p2p website, it means that there are many borrowers who cannot repay loans. This is risky since there is nothing given as collateral to cover the borrowing or a financial body that takes care of defaults as is the case with banks and other financial institutions. However, there are [url=https://www.investopedia.com/articles/investing/092315/7-best-peertopeer-lending-websites.asp]various p2p websites[/url][font="Calibri Light", sans-serif] with the provision or contingency funds meant to cater for defaults made by borrowers. These funds vary a lot depending on the site, hence the need to get to know what’s covered prior to lending out your money.[/font][/li][/ul][ul][li][b]Early or Late Repayment Risk: [/b] An early or late repayment of your loan means making less profit than had been anticipated. For early repayments, you can consider issuing out the money again, although the interest rates may not be the same.[/li][/ul][ul][li][b]P2P Website Going out of Business: [/b]Lenders can lose their money should the p2p website go out of business as has been the case in the past. Therefore, make sure the site you use is regulated through a Financial Conduct Authority where your money is kept in ring-fenced accounts other than those of the p2p website. [/li][/ul]
[/ul] [b]Tax Imposition[/b]
[b] [/b][font="Calibri Light", sans-serif]The interest earned from p2p lending is taxable. However, it is you to inform HM Revenue and Customs concerning the interest earned. [/font][b] [/b][font="Calibri Light", sans-serif]All tax on interest received should be paid whether you get full amount or borrowers default. With an Innovative Finance ISA, p2p loans can be put in an individual savings account (ISA) implying that interest can be received from the p2p loans without remitting the tax.[/font]
[font="Calibri Light", sans-serif]Peer to peer lending happens a lot these days but you must understand what goes on in there to stay safe. There isn’t much security given for the lending to happen hence the risks involved are higher than those in conventional banking. Lenders should, therefore, ensure that p2p websites are regulated via the Financial Conduct Authority or any other body concerned with the same. This will help a lot in lessening the risks involved. [/font]

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