Peer to peer loans are an alternative investment for individuals to lend directly to other people or businesses without using a bank.
Peer to peer lending operates on a ‘many to many’ lending model through a lending platform, who arrange and manage the loans. They put lenders with money in touch with borrowers.
Loans are typically split into smaller parts and lenders typically split their investments across multiple loans.
The advantage of Peer to Peer loans for lenders is that they:
- can generate higher interest rates that exceed the interest that could be earned from banks and other financial institutions
- give borrowers an alternative to the finance which they may get from standard financial intermediaries
- spread or split your investment across many loans, reducing the losses from credit default
- Market Risk – Loans and returns tend to be fixed or pegged so there is less risk of market movements with things such as Equities and funds
The disadvantages of Peer to Peer lending:
- Credit Risk – The companies you load your money too can and do default. You capital is at risk and often not covered by the Finance Services Compensation Scheme
- Operational risk – Peer to Peer lenders are new entrants to the financial markets. They typically have new IT systems and operational procedures which can add to the operational risk