:fill(fff,true):no_upscale()/contentlounge-s3.bf-contentlounge-production.aws.bfops.io/styles/manual_crop/s3/2021-01/capri23auto.jpg "Investing in P2P lending: this is how peer-to-peer works")
Investing in P2P lending can be a rewarding passive source of income. However, there is always a risk and there are also different online platforms. In this article we will explain how P2P lending works.
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Investing in P2P loans – this is how it works
In this section we explain how this type of loan works and what you should know about it.
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- P2P stands for “Peer to Peer”, which again means something like “equal status” in German. With regard to a loan, this is a party with whom you are financially on an equal footing, i.e. a second private person. You can also use “from private to private” as a mnemonic.
- With this type of loan, you as a private person lend a certain amount of money to a second private person. You will receive interest from the borrowed person. The lending party has the chance of getting better interest rates than with a bank, the borrowing party has a chance of getting money even with a poor credit rating. The other way around, a private person can easily take out a loan.
- The formalities are usually handled via an online platform. There are now many German and foreign providers. These check the lender and also have a debt collection department to collect any outstanding money.
- Please note, however: Even with this type of investment, there is no one hundred percent security. It can happen that the debtor voluntarily or involuntarily does not pay. While the platform tries to collect the money, it doesn’t always succeed.
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These online platforms exist
In this section we introduce you to a few common platforms for P2P lending and explain special features.
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- The best known German platform is auxmoney, but Smava and Lendico also come from Germany. Other well-known companies are Mintos from Latvia, Bondora from Estonia and EstateGuru also from Estonia.
- A comparison of the platforms is worthwhile, because each one has its own special features. For example, pay attention to the minimum deposit value. Many platforms specify at least 25 euros in a loan project as a minimum deposit, while others need more.
- You should also look out for a secondary market. If you have invested in a loan project, you theoretically own shares in the loan. A secondary market gives you the opportunity to sell these shares to someone else. The shares are usually tied for a longer period of time, usually several years. If you sell the shares, you will ideally get the money back immediately.
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In the next article we will explain the term guarantee credit to you.
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