In peer-to-peer (P2P) lending, a person lends money to another person or business which is entirely different from the traditional money lending process. Normally, when people need a huge amount of money, they will borrow from a bank or a financial company. P2P acts as a linking bridge that connects people who are willing to lend their money with people who need money.
Just like any other investments, P2P lending has pros and cons. Let’s start with the benefits of P2P investment:
1) Substantial return – P2P investors can gain stable and predictable return of investment (ROI) when borrowers pay back their loans every month. This will be their consistent passive income.
2) Low entry barrier – By comparison to other investment methods, P2P is the preferred choice of many new investors as it only requires minimal capital to begin with, and it only charges you a one-time cost.
3) Higher return – A well planned portfolio enables investors to earn significant returns that can go up more than 8% on an annual basis. This is a great opportunity to diversify your portfolio while gaining benefits from it.
4) Risk Evaluation – Investors can choose the level of risk that they will be facing, which means they can choose to lend their money to higher or lower rated borrowers. Of course, the higher the risk, the greater the return will be. Investors can also choose to spread the risk among different borrowers.
5) Set Your Own Rules – Not only are risks under control, but investors can also set the type of loan to fund, debt to income ratio, return duration of borrowers based on their preferences. After determining these guidelines, investors no longer have to worry and only wait for their returns in the meantime.
On the other hand, the disadvantages of P2P lending are stated as below:
1) Risk of Default – If the borrower defaults, the investment will be gone, there are certain risks that this might happen as P2P does not require the borrower to submit any collateral nor are investors being protected by banks or credit unions. Thus, the investor might lose their capitals.
2) Lack Protection – P2P lending is highly dependent on the current internet technology to link investors (money lenders) and borrowers. Users of the P2P platform will face problems such as fraud losses if there is a network failure, website breakdown or if the borrower defaults. P2P investors are not protected by any financial laws.
3) Costly managing fees – Most P2P platforms will charge investors around 1% of capital to handle all the loans. On top of that, investors may need to offer a rebate in order to attract borrowers.
4) Lack of liquidity – In P2P, the money of investors will be held until the loan is fully repaid. The investor can’t withdraw their investment during that time frame because most traditional P2P platforms would not allow investors to do that.
If you are interested in either investing or getting a loan from Hap2py, feel free to contact us anytime at [email protected].
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