In recent years, the term P2P loans, also called peer-to-peer credit, has become increasingly popular. These are personal loans, but what exactly does that mean?
What exactly is this P2P loan?
One thing has to be made clear right from the start. P2P loans are not loans within the family or from friends and acquaintances. It is therefore not a personal loan, but a private loan. These are official loans that are granted directly by private individuals to other private individuals. So the money does not come from a bank like it usually is with a loan. The term P2P loans could best be translated as person-to-person or private-to-private. The private alternative to traditional bank credit was only made possible by the general spread of the Internet.
The beginnings of P2P loans
The first P2P loans were granted in Great Britain and the USA in 2005/2006, Germany followed in 2007. The principle behind the P2P loans is actually quite simple. Donors, who are also called investors, have funds at their disposal that they want to invest profitably. On certain sites on the Internet, they meet with borrowers. These are private individuals who need money and apply for a loan on the website.
How does such a peer-to-peer loan actually work?
However, the number of providers is constantly growing. Registering and creating a profile are almost always free of charge. The potential borrower makes his loan request online. In it, he expresses how much money he needs for what purpose and how he wants to pay it back. The potential lender looks at the loan request and decides whether and how much money he wants to invest. The whole thing is based on the principles of the market.
What are the advantages of P2P loans?
The loans offer both donors and borrowers a number of advantages.
Benefits for borrowers
German banks are very conservative when it comes to approving loan applications. This makes it very difficult for whole groups of customers to get a loan. These include, for example:
- Consumers with negative entries at credit record
- Freelancer and self-employed
- Temporary workers
- low income
P2P loans often give these bank disadvantaged customers a chance to borrow money. P2P loans consider the social component of a loan much more than banks do. This means low earners or customers with a good but irregular income (typical for the self-employed) can get a peer-to-peer loan.
The conditions for the repayment can be determined by yourself.
Advantages for investors
For lenders, P2P loans are primarily a lucrative form of investment. Classic types of investment such as time deposits or overnight accounts hardly offer any noteworthy returns. Other types of investment such as shares are either very very risky or only possible from certain amounts. Even today, in times of low interest rate policies, P2P loans can generate returns of 5 percent and more. In addition, P2P loans promote social engagement. People get a chance to make their dreams come true.
What are the disadvantages of P2P loans?
Disadvantages for borrowers
The main disadvantage for borrowers is that they often do not inform themselves well enough about the conditions. They are often in a desperate financial situation and put their last hope in a peer-to-peer loan. The disappointment is all the greater if the loan project finds no investors and disappears into the sinking.
It is also widely accepted that this type of loan is granted without credit record. But that’s not true. The credit record is checked because every creditor who lends money commercially is obliged to do so in Germany. However, the investors decide individually whether and how much money they want to use. With light to medium-weight entries, P2P loans offer better opportunities than bank loans, but with heavy negative entries there is no chance.
Often high interest rates for borrowers
To find funders, the borrower must disclose personal information and woo investors. Although the conditions for repayment can be set individually, borrowers must note that investors make money with their investment, but do not want to give it away.
Disadvantages for lenders
P2P loans also have some disadvantages for investors. The most significant is probably the increased risk. An attempt is being made to “screen” potential borrowers as best as possible, but there is no 100 percent certainty. Most of the time, the loans are relatively small amounts, so P2P loans are not suitable for investing large sums. Therefore, P2P loans are not an ideal investment, but can be an interesting addition to a portfolio.