What is P2P Lending, How does it work?

When you urgently need money, or simply want to finance an important project, resorting to a bank loan can be far too slow and laborious.

Fortunately, there are other interesting financing solutions such as peer-to-peer (P2P) or peer-to-peer lending. It is an innovative loan system through which you can borrow or lend funds with greater ease.

Find out the basics of what you need to know about P2P lending and how it works.

Peer To Peer Presentation

Peer-to-peer is a peer-to-peer financial system. It brings together borrowers and lenders on an approved crowdfunding platform. You can obtain a loan directly from an individual (individuals or companies …), all without resorting to the bank.

P2P is subject to the legal rules of loan contracts: the lender undertakes to allocate money to the borrower who undertakes to return it with interest. It allows a company to raise funds as well as an individual to renovate or fit out his house, for example.

Its idea is to facilitate access to credit for households that do not have the solid guarantees necessary to contract a loan from banking organizations. The objective is to access loans at relatively flexible conditions while limiting the costs associated with banking intermediation in particular.

How does a P2P loan work?

The operation of the P2P loan is relatively simple. It brings together 3 players in the foreground: the lenders who invest in the loan, the borrower who applies for credit, and the P2P platform which acts as an intermediary and charges a commission in return for its services. In practice, eligible lenders and borrowers will register on a P2P platform.

Borrowers will submit their project and the amount of the loan requested on the platform. This assesses the profile of borrowers and assigns them a credit score or credit rating according to the risks they present. The platform then makes available to lenders who invest all this information necessary for their decision-making.

Lenders for their part can then choose the projects in which they wish to invest their money as well as their criteria (amount loaned, interest rate, duration, etc.) that the borrower can generally negotiate. The funds collected are transferred to the borrower’s account and the transaction results in a contract.

How to invest well in P2P?

To succeed in your P2P investment, it is advisable to follow a few simple rules in order to minimize the risks and optimize the return on your investment. First and foremost, you need to determine your investor profile. This involves defining your financial goals, the capital you can afford to expose and your level of risk tolerance.

Once this is done, you must then carefully choose the platforms on which you want to invest. Opt for legal, secure platforms with good rates of return. Finally, never invest all your capital in a single project. Spread your loans across multiple projects and invest in multiple P2P platforms to minimize the severity of losses in the event of borrower default or platform bankruptcy

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