P2P lending can be a great alternative for small investors who want to earn good returns and business people who need financing which they cannot qualify for with traditional banks. In order for peer-to-peer lending to work for you, you must be prepared to do in depth research. Take this form of investing seriously because you can easily end up in a financial trouble if you are not vigilant. Consider the following tips when looking to join a P2P investing service.
Borrow only what you need
If you are a beginner borrower, start by taking only a loan amount that you absolutely need. Don’t take any amount in excess because it will likely lead to unnecessary complications. Furthermore, if you quote an amount that is higher than the reasonable required capital then it’s going to be harder for you to get peer lenders who believe in your venture.
Start with a short-term loan
If it’s your first time borrowing, start by taking a short-term loan. Most short-term loans have a lower monthly payment but sometimes the interest is going to be much more. Applying for a short-term loan is also likely to work for you if you are an amateur borrower. Furthermore, try to keep the loan amount modest so that you can repay it as soon as possible and in turn gain trust with a higher amount in the future.
Do thorough research
If you want to venture into commercial real estate investing then research comprehensively on how you can take advantage of P2P loans. Before you make any agreements with commercial mortgage brokers, you need to be sure that the money will come back once you sell the property and that you are going to pay lenders the amount borrowed together with the interest. It may seem easy to secure the P2P loan but paying it back can be arduous if the investment did not yield favorable returns. Know all the risks possible and develop a plan to overcome the challenges you are likely to face.
Carry out independent investigation on P2P lending to understand how it works. There are a number of online resources that offer tips for P2P borrowers and investors. Whether you want to come up with a project that will attract the highest number of investors or you would like to put your money in a business idea that you believe in, make sure analyze the venture in depth.
Over the past decade, borrowers are finding it difficult to secure loans from commercial banks. It becomes tougher especially when you have little or no credit history that a financial institution can rely on. It is for this among other reasons that borrowers have turned to peer-to-peer investing firms. Generally, peer-to-peer lending involves matching potential borrowers with lenders. It cuts off the middleman aspect, a role played by mainstream banks. As a result, borrowers secure funds at rates slightly lower than what they would have obtained from banks.
Another aspect of P2P investments is that all transactions are carried out online. If you have some amount of cash that you are not using, this is an ideal way of profiting from your savings. One of the greatest worries among investors is how to get their money back. There is no need to worry about that. P2P websites vet all borrowers by carrying out credit checks on them. Many firms also do debt chasing meaning that you don’t have to spend a lot of time or hire debt collectors.
It is common for people to think that P2P and CSF is one and the same thing. Despite the fact that the principle behind them is the same, the two are different. The two modes of raising funds involve pooling of resources. Here are the main differences:
- CSF is ideal for businesses that are only starting up. If your business is a startup, you sell the idea to investors. If they like it, they put their money into your venture. After your business picks up and you get good returns, you pay back the money together with a reward on top.
- On the other hand, P2P does not involve giving away the equity in your business. Nonetheless, investors inject cash into an existing business. In return you repay the amount borrowed together with interest. This works in the same way as borrowing from a bank.
- While CSF finances startups, P2P finances existing and established businesses. You can borrow a loan for buying property, boost working capital and buy stock or purchase factory equipment.
Real estate P2P works in a similar fashion. As a real estate investor, what you do is seek people to invest in your venture. After securing the loan, you buy property, renovate and resell it at a higher cost. Upon completing the sale of your property, you pay back the lender plus interest. In the end, each party benefits from the arrangement.
Until recently, P2P lending was only for businesses. The concept has now found its way into the real estate market. A number of companies provide the much needed funds.
Peer-to-Peer Investment in Opposition to Equity Investment
Person-to-Person or peer-to-peer lending involves lending money from one individual to another. P2P loans are an investment opportunity that many people are embracing at a high rate. I P2P lending, borrowers opt not to seek financial help from tradition lending institutions due to the fact that there are many qualification procedures that must be passed. P2P has succeeded in eliminating traditional financial intermediaries by establishing online private investing on online platforms. Peer-to-peer companies like Blackhawk Corp have embarked on connecting borrowers with the corresponding investors.
Major pros of investing in peer-to-peer lending include:
-Stable interest rates that do not depend on the economy but on the agreement between the borrower and investor compared to CSF that instead depends on the economy.
-More income achieved from interest rates charged by the investor unlike the interest gained from saving your cash in traditional banks.
-As the number of borrowers increase so does the income because there will be an increase in the amount of money gained from multiple interest rates.
-Minimum risks in P2P due to the security conditions placed in case the borrower does not clear a debt. This provides a constant income flow without losing your money to borrowers.
-P2P lending provides the investor with a chance to interact with the person acquiring the loan as the transaction process is conducted online.
Many people invest money for various long-term commitments as well as pension tend to believe that CSF is the best mode of investment. This involves choosing equities that are able to produce high returns. Equity investment provides a good opportunity for commercial mortgage brokers to convince various investors on the most profitable mortgage to buy shares from. This is because they provide a good income potential compared to residential mortgage. The annual return off the buying price ranges between 7% and 13% depending on the location. CSF operates commercial property as a business thus the annual return is shared among the shareholders, unlike P2P where the private investor is the sole owner of the return.
Many people opt for secured investments in order to prevent any risks. Traditional banks have seized from being the only financial provider as peer-to-peer lending and equity investment provide a better opportunity for many people to generate more income. Compared to P2P, CSF has also attracted many investors as it provides the investors with a greater chance of earning more cash depending on the type of share bought from the stock market. Peer-to-peer investment poses a greater chance of not losing your money as it offers platforms that involve giving out secured loan to the borrowers.
Crowd source funding (CSF) and peer-to-peer lending (P2P) have seen many people attain alternative and convenient methods of funding and raising capital. On the other hand it has also seen investors utilize an alternative to stock markets to invest their savings and reap profits. One of the sectors that has received a huge boost is real estate. With a reliable source of investment property loans, more people have gone back to the sector that was previously avoided after the economic meltdown.
The question most people have is which option to choose between crowd source funding and peer-to-peer lending. The two forms are very different but thanks to sites that deal with both, there has been much confusion on which method best suits who. There’s a huge risk for both investors and people seeking funding when it comes to receiving funding from a company that claims to provide both forms of financing. This is because unlike P2P, which is simply a market place for borrowers to meet lenders and compare the terms to find the most suitable, a CSF company is where investors look for equity in the most rewarding prospects. This difference in approach and nature places the following risks for those who seek loans in a company that does both crowd funding and P2P.
1. Higher rates
When it comes to the borrowers, they face experiencing high rates on loans advanced to them. This is because unlike exclusive P2P firms where investors mitigate their risk by having the option on which loans to invest in and having the credit history of the borrower to guide them, CSF investors do not have such an opportunity. Thus the only option left is to mitigate their risk by having higher interest rates on the loans.
2. Higher risks for investors
Usually, the risk that comes with investment in crowd funding projects is high. However, this is increased by the addition of P2P business since the company is not well facilitated to handle both types of business and the investor has little to protect them should the borrower default payment.
3. Conflict of interests
CSF is usually in its pure sense more favorable to the investor since they face a higher risk on their investments. On the other hand, P2P employs a fair approach where the borrower gets to set the terms and the lenders bid on loans they find favorable. By combining the two businesses a conflict is created amongst lenders and borrowers and no party gets served satisfactorily.
Peer lending and crowd source funding are two alternative means by which businesses and individuals can secure investment capital without enlisting the services of the traditional banks. Even though the two share a similar concept of raising funds, many people fail to recognize that there are substantial differences between peer lending and crowd source funding. Without understanding the difference between the two, it can be difficult to realize which option is suitable for your needs.
Peer lending deals provide capital by credit to already established businesses and/or real estate investors who are in need of cash injections for business or investment purposes. They offer a great alternative to traditional banks as they provide efficient and flexible means of accessing finance by the established enterprises. In peer lending, you do not have to give any form of equity. All you have to do is pay interests on the principle amount that you borrowed. In order to access these funds, you have to provide the financial information, why you need the funds, and the exit strategy enabling the loan to be repaid. Secondly, a form of security will be required just like most asset backed loans; i.e., capital equipment, real estate, cars, etc..
Crowd source financing, on the other hand, deals with providing funds for individuals who don’t have any existing business and have ideas that they need to get off the ground. In its early form, crowd source funding was mainly focused on providing assistance to investors and entrepreneurs who had ideas but did not have the financial capability to implement those ideas. In this case, those with the ideas would present their ideas to a group of investors and if interested, they would make contributions towards the proposals. Unlike peer lending, you do not pay back in interest, but rather exchange equity and profits to pay back those investors that made your idea become a reality.
Another significant difference between the two is the fact that in crowd source funding, there are more risks and usually no guarantees exist that the original investment will be repaid. This is not the case with peer lending where an asset of equal or greater value must be collateralized before the funds are given. Crowd funding also operates within their confines as pre-vetted deals by a third party, whereas with peer lending all the processes are pre-vetted by your selected licensed professionals, and reviewed by you as final due diligence to ensure transparency for all the parties involved in the transactions. Peer lending is more of a self-directed investment for those investors that seek greater control and desire safe factors of lending, while crowd funding provides an additional upside with the inherent risk of an equity investment and allows passive investors to acquire pre-vetted deals by a third party they select to trust.