What Is P2P Lending? 5 Business Models Explained
Peer-to-peer lending allows you to make money online by investing in loans borrowed by individuals and businesses alike. We go over what P2P lending is and its five different business models in this blog to help you learn more.
Snippets of how peer-to-peer lending works
- An investor lends money to a borrower through a lending company.
- The lending company distributes the investor’s money, and the investor receives a claim against the borrower.
- The borrower pays back the loan (principal and interest) to the lending company.
- The lending company charges a nominal fee from the transaction and transfers the remaining amount to the investor.
How much money can you make as a P2P investor?
On average, you can make 10% per year by investing in peer-to-peer loans. But make sure you’re aware of all the details before investing in these loans since multiple factors impact your returns.
Another factor that can affect the safety of your investments and returns is the P2P lending business model.
Five P2P Lending Business Models
- P2P Platforms
- P2P Marketplaces
- P2B Platforms
- P2B Marketplaces
Investing Through P2P Platforms
Here’s how P2P platforms work:
- You invest through a P2P platform (that’s also the lending company and loan originator).
- The lending company helps borrowers with money.
- The borrower pays back the loan with interest to the lending company.
- The lending company charges a fee and transfers the rest of the amount to the investor.
|You know exactly where your investment goes.||There aren’t many investment opportunities that match your preferences.|
|There’s less risk since the lending company has direct access to the borrower.||Limited diversification of your portfolio.|
Investing In P2P Marketplaces
The lending company doesn’t have any platform. Instead, it lists the loans on P2P marketplaces with other lending companies, also known as loan originators.
Here’s how P2P marketplaces work:
- You invest money in a P2P marketplace.
- The P2P marketplace transfers the money to the loan originator.
- The loan originator lends the money to a borrower.
- The borrower pays back the loan to the loan originator.
- The loan originator sends the funds back to the P2P marketplace.
- The P2P marketplace charges a fee and adds the funds back to your investor account.
|Your investments are secured by a buyback guarantee.||Assessments of loan originators are not always accurate.|
|Opportunity to create a broadly diversified P2P investment portfolio.||These marketplaces are financially dependent on their loan originators.|
|You get more investment options here than on P2P platforms.||Most loans are unsecured consumer loans.|
Investing Through P2B Platforms
P2B platforms are lending companies that lend money to businesses instead of private individuals. The primary difference between P2P and P2B lending is that business loans are secured by a mortgage, business collateral, or personal guarantees.
Here’s how P2B platforms work:
- You invest money on a P2B platform that’s also the loan originator.
- The lending company lends money to businesses providing collateral for their loans.
- The businesses return the money (with interest) to the P2B platform.
- The lending company deducts its fee and transfers the rest of the amount to your investor account.
|Your investment is secured by a mortgage.||The minimum investment amount is higher than other platforms.|
|Potential returns are higher.||This lending business model is an easy and popular target amongst scammers.|
|There are many differences between individual P2B platforms.|
|Not all P2B platforms are as transparent as P2P platforms.|
Investing In P2B Marketplaces
P2B marketplaces list loans from loan originators that solely fund businesses. What differentiates this marketplace from P2P marketplaces is that the borrower is a company instead of a private individual.
Here’s how P2B marketplaces work:
- You invest money in a P2B marketplace.
- The P2B marketplace sends the money to the loan originator.
- The loan originator lends the money to a business.
- The business returns the money with interest.
- The loan originator transfers the money back to the P2B marketplace.
- The P2B marketplace charges a fee and sends the rest to your investor account.
|Your investment is secured by collateral.||The returns on your investments are low.|
|There’s better monitoring quality compared to P2P marketplaces.||This lending business model is an easy and popular target amongst scammers.|
|There are limited P2B marketplaces to choose from.|
|You can’t access your money immediately.|
Investing In REITs
Real estate investment trusts (REITs) are real estate companies that own and manage residential and commercial properties such as apartments, office spaces, or warehouses generating regular rental income.
You can earn a monthly income by investing in apartments without needing to take risks and spending time managing or buying a property.
Here’s how REITs work:
- You invest in a property through a real estate platform.
- The REIT purchases the property and rents it out to tenants after reaching the funding target.
- The tenants transfer their monthly rent to the REIT.
- The REIT transfers the monthly rent back to your investor account.
*Note – If the REIT sells the property you’ve invested in at a higher price, you’ll receive high returns from the capital gain.
|There’s monthly cash flow.||The returns on your investments are low.|
|Your investments are well secured.||The total return relies on market volatility.|
|This investment is most suited to advanced investors.||There’s no cash flow if there’s no tenant for the property.|
The final words
If you are confused about which lending business model you should choose, remember it’s a personal choice. You’ll need to consider your investment goals and the risks you are ready to take.
If you’re just getting started, we recommend you download the Lendee app,