P2P lending is the process of loaning money to borrowers over a simple online platform. The platform connects lenders to borrowers and cuts out the banks. Each borrower seeks to receive a lump-sum loan from lenders, which they are afterward used to refinance other debts, consolidate loans, or meet other financial needs. Loan sizes can vary from as little as $5,000 to as high as $250,000 depending on the creditworthiness of the borrower and the desired use of the loan. The average loan is typical $15,000, while the annual interest rates can range from 7 to 36 percent, with terms for three to five years. The actual loan is dispersed into small chunks, for example, a $10,000 loans can be divided into $25 ‘notes’, which are then bought by the lenders. The crowdlending platform facilitates the repayment of the loan alongside the interest rates from the borrowers to lenders while making money from taking a small portion of the payment in alongside an origination fee of the loan.
Since its inception, the P2P lending model has proven to be a highly effective alternative to loans from banks and other financial institutions. It is also preferred because it offers a streamlined application process and instant credit decision.
The history of P2P Lending
Peer to peer lending is just over a decade old. The first company to utilize this model was a UK-based Zopa, which has since provided more than $2.9 billion in loans since its inception in February 2005.
In the United States, the concept of getting loans without the use of banks or other traditional financial institutions started in 2006 in Silicon Valley. Its beginnings were rather humble than in the UK, with Prospers launching in February 2006, then shortly thereafter, LendingClub was launched. Today, LendingClub is considered the largest peer to peer platform in the world, having been Facebook’s first application.
Up until 2008, crowdlending had fewer restrictions on the eligibility of the borrower, and their loan offerings were not registered as securities. But in 2008, the landscape changed after the Securities and Exchange Commission (SEC) stepped in, citing the need for acquiescence with the Securities Act of 1933. This move shook the P2P industry and lenders were required to register with the commission, which caused LendingClub to shut down for six months. Other players left the market completely.
P2P Loans Comparison with Other Types of Loans
Peer to peer loans is typically compared to bank loans. A bank loan is a traditional form of lending meant to finance whatever needs a potential borrower may have and often come in the form of a personal loan. Borrowers who have good credit may benefit from bank loans due to competitive interest rates. Bank loans can be for such things as debt consolidation, wedding expenses, unforeseen medical bills, or home improvement. These types of loans usually come without the need for collateral.
The primary difference between peer to peer loan and a bank loan is the lender. If the funds come from a lender who is either an individual or a group on an online platform, then that is a peer to peer lending. But it comes from a bank or a credit union or other financial institution, then it is a bank loan.
The interest rates quite similar in both loans, with peer to peer ranging from 7 to 39 percent APR while bank loans from 6 to 36 percent APR.
The Best P2P Lending Platforms in Europe
Europe is the pioneer of crowdlending, and here are some of the best platforms that taking the industry by a storm.
Mintos
Mintos is the largest P2P lending in Europe. The platform has a wide range of advanced functionality, with thousands of available business and personal loans and more than 20 loan originators.
Grupeer
Mintos and Grupeer are Latvian P2P platforms that are also major players in Europe. It was launched at the beginning of 2017 and has more than 4,000 investors joining since then. Some of the features in Grupeer include auto-investing, buyback guarantees, and much more.
Crowdestor
Crowdestor is another biggest crowdlending platform in Europe with offices in Latvia, United Kingdom, Germany, and Russia. All loans offered are collateral backed and or covered by the Buyback Fund. The platform was launched in 20018 and has funded and facilitated capital for not least than 17 projects.
