Peer to peer or P2P lending is the process of unrelated companies or individuals lending money directly to borrowers without the need for banks or any other financial institutions. The peer to peer industry is rapidly growing, with the lending volumes for this year reaching billions of euros, and it could reach over 50 billion by 2022.
There are three principal categories of P2P lending; consumer p2p lending, business p2p lending, and real estate p2p lending.
Each individual category has different financial circumstances but the core concept is the same.
Before we get into the types of peer to peer lending categories let’s go through the basics.
P2P Lending Basics
Qualified borrowers usually pay low-interest rates than banks, while investors or lenders enjoy returns they would otherwise not earn elsewhere. The process results in a virtual environment on which borrowers and lenders interact and form a community.
Borrowers are required to complete an online application, while lenders use the information provided by the borrowers to check credit scores and qualify them. They determine the loan interest by considering the length and amount.
The credit scores vary, above but at least you must have something 600. Just like traditional bank loans, the better the credit score the more favorable terms you get.
Late payments are also penalized, with the majority of platforms charging an average of $15 for 15 days overdue.
Peer to peer lending is still favorable for people with bad credit score because lenders have much more flexibility in setting qualifying standards than traditional banks.
P2P loans are usually $40,000 maximum, though some sites offer more than that.
Types of P2P Categories
Consumer Peer to Peer Lending
Consumer P2P Lending deals on personal loans. This is the most common types of loans provided peer to peer lending platforms. Its popularity is fueled by flexibility.
Another factor that makes personal loans popular in crowdlending is credit quality. While banks lend their loans within a narrow credit score ranges, consumer P2P lending tends to extend loans to borrowers with fair credit.
If you have a decent credit score, you can borrow up to $35,000 from most of the platforms, which are typically unsecured loans with a timeline between 2 to 5 years. The interest rates usually start from mid-single digits, which is much lower than what you will have to pay on bank loans.
Consumer P2P lending offers fixed-rate loans that will pay in full within five years period. This allows the borrower to get out of debt quickly than if they had to work out payoff strategies with lines of credit.
Most P2P platforms will do consumer loans. Mintos is the largest peer to peer lending platform in Europe and one the largest in the world.
Business Loans
Business P2P lending is also a common Peer to peer lending category that caters to businesses. Banks usually have strict lending criteria, requiring a pile of documents, and don’t usually make as many loans as they claim.
Peer to peer platform is bringing all the same benefits to businesses that are bringing to consumer loans, which include low-interest rates, the easy and simple application process, greater credit flexibility and quick loan turnaround time.
It is possible sometimes to get business loans on peer to peer platforms that are unavailable from other financial institutions.
Four of the most common P2P lending sites in Europe are Mintos, Grupeer, Crowdestor, and Monethera.
Real Estate Loans
Last but not least, real estate p2p lending is a type of peer to peer lending that focuses on loans for property development.
This category is usually further divided into 3 classes; new real estate development loans (finance a loan to build a new property that will then be sold), buy-to-sell loan (buy a property, renovate it, resell it, and earn on the plus-value), and lastly, buy-to-rent loan (buy a property, renovate it, and then rent it to earn income).
Investment loans in real estate typically range from 100,000 to 5 million euros.
