Peer-to-peer lending: Advantages and Disadvantages

Peer-to-peer lending offers both investors and borrowers several advantages over more conventional forms of finance, but there is a potential downside too. In this blog post, we’ll take a look at the different pros and cons of this innovative form of funding, and the ways in which EstateGuru attempts to maximize the former while attenuating the latter. 

How does it work?

First off, let’s define what we mean by peer-to-peer lending (P2P). In essence, P2P lending allows borrowers to loan money directly from individuals, without the mediation of a bank or any other traditional financial institution. P2P platforms, like EstateGuru, assess loan applications from would-be borrowers, determine the risk involved in the venture and the credit rating of the applicant, and then either approve or reject them.

Successful applicants are assigned an interest rate based on the criteria above and other factors. Should the applicant choose to accept the terms, their project is published on the platform for users to consider, and potentially, fund. The borrowers are subsequently responsible for making periodic (usually monthly) interest payments and ultimately repaying the principal amount when the loan maturity date is reached. One important distinction, when it comes to Estateguru, is that our loans are secured by a first-rank mortgage, meaning that our borrowers provide collateral in the form of real estate. This means our investors have first claim on the proceeds from the forced sale of the property in the event of a borrower defaulting. This is not an outcome we want, and it very rarely happens, but it’s reassuring to know nonetheless. 

If you’re interested in reading more about P2P lending and whether it’s a safe option for your money, click here.

Advantages for Investors

Investing on a P2P platform offers a chance to earn significantly more interest than a traditional savings account or cash ISA, some of which are barely able to keep up with inflation. The risk and reward ratio, and the rates of return, are often very alluring. EstateGuru, for example, offers users an average annual return of just over ten percent. Conversely, thanks to our stringent due diligence processes, the default rate for projects on the site is extremely low.  

Another advantage of P2P is the opportunity to diversify your portfolio. Putting your money into multiple investments mitigates the risk of your funds being impacted by economic turbulence, or a business going bust. EstateGuru offers users the opportunity to diversify across multiple loan types, projects, and markets, allowing for greater investment safety.

P2P platforms carry out their own risk assessment protocols for loan applicants, to ensure that borrowers are creditworthy and operating in good faith. Appropriately comprehensive underwriting should include credit, affordability, identity, and fraud checks. Borrowers on the EstateGuru platform are pre-vetted to meet these and other strict criteria. Additionally, as mentioned, the vast majority of our loans are secured by a first-rank mortgage. In the event of a default, this collateral is auctioned with a view to reimbursing our investors as quickly as possible.

Disadvantages for Investors

Typically, peer-to-peer loans are exposed to high credit risks, as some platforms provide loans for borrowers whose low credit ratings prohibit them from obtaining conventional financing. As mentioned above, EstateGuru’s selection processes are designed to protect our investors against the risk of a defaulting borrower. We like to remain conservative in assessing the collateral provided by our borrowers and keep our Loan-to-Value Ratio at less than 70 percent, which further safeguards against losses.

P2P lending platforms and their users do not enjoy any form of government protection or insurance. Some jurisdictions have even gone so far as to prohibit P2P lending altogether. EstateGuru has operating licenses in Lithuania and the UK (FCA p2p lending license). EstateGuru is not regulated by the EFSA (Estonian Financial Supervision Authority), because according to Estonian law, a license is not required to connect borrowers with investors.

In order to optimize your returns, it’s often necessary to commit your funds for a long period of time (typically a year at least). If you’re looking to turn a quick profit, P2P may not be the ideal choice. EstateGuru recently introduced a secondary market on the platform, which allows investors to sell their existing claims to other investors before they reach full maturity. This feature allows users to improve liquidity and earn profits on investments over a shorter period than 12 months.

Advantages for Borrowers

Peer2Peer lending can provide a more accessible source of financing than more conventional sources. Banks and financial institutions are frequently unwilling to back developers who can’t boast an extensive track record, or issue loans when the amount is not sufficiently high. In addition to partnering with some of the biggest real-estate developers in Europe, EstateGuru also prides itself on bridging the gap in financing left by banks unwilling to support smaller projects.

Things happen faster online, and Peer2Peer lending is no different. Compared to banks, which are mired in protocol and procedure, P2p lenders are often faster and more flexible. EstateGuru, for example, provides financing without unnecessary admin, red tape, or waiting periods. Comprehensive and responsive assessment is carried out by our team of multinational specialists, and we authorize loans on a daily basis. In fact, securing a property loan from EstateGuru is up to five times faster than traditional financial institutions.

Some platforms, like EstateGuru, allow borrowers to repay their loans ahead of schedule without incurring a penalty. EstateGuru offers flexible repayment terms so that borrowers can choose the schedule that works for them. Borrowers can also apply for three different loan types; bridge, business, and development, each tailored to meet specific borrower requirements.

Disadvantages for Borrowers

In addition to the interest rate charged on the loans, P2P platforms may charge additional fees as well. EstateGuru charges a success fee (typically between 2.5-4% of the funded loan volume) once funding has been fully obtained and an annual administration fee in the range of 0.5-1%.

Should you be unable to repay a loan taken from a P2P platform, you may not receive the same protection as you would when borrowing through a traditional lender. 

All investments, including real estate, are speculative in nature and involve a substantial risk of loss. We encourage our investors to invest carefully. We also encourage investors to get personal advice from a professional investment advisor and to make independent investigations before acting on information that we publish.