Peer-to-peer credit (also known as ‘P2P credit’) is the financial framework that connects lenders and borrowers via an online platform, without a bank acting as a third party. This lack of intermediaries – and the associated lower costs – make P2P loans an attractive investment opportunity.
It is not news: deposit savings accounts do not raise money. With an average annual return of less than 1.50% per year, savings rates in the Netherlands are historically low. And it does not look like this interest rate will rise significantly in the near future.
What is a peer to peer credit?
If you are not yet familiar with the concept, the peer to peer community can sometimes raise some suspicion. However, this is unfounded.
Peer to peer lending is an extremely reliable method of lending money, based on transparency and fair and clear conditions.
With peer-to-peer credit, you temporarily lend your money (= your investment) to people with a credit need (business or private) and receive an interest payment in return.
Through P2P credit platforms, borrowers who are unable (or unwilling) to apply for credit through traditional banks (such as newly established companies, starting independent entrepreneurs, or persons without ownership or capital that can be used as collateral) can receive support via crowdsourcing to meet their credit needs.
Individual investors can choose which credit propositions best suit their criteria and then decide for themselves how much they want to invest in the credit in question.
In return, they receive a proportional amount of the monthly repayments from the borrower, plus interest.
This process lasts until the loan and the stated interest rate have been fully paid off and the investor can choose to reinvest or pay out the money earned (automatically).
Location and Growth
Peer to peer lending arose in response to the financial crisis in 2007. People had lost their faith in traditional credit institutions and started looking for alternative forms of financing.
Moreover, new legislation on the provision of credit did not allow banks to lend money to a large number of potential borrowers. This forced them to look for alternative means of financing.
At the same time, after the crisis, savings rates fell to a historically low level: only an average of 1 percent per year (from 2009 to November 2017) – causing even more people to look for alternative financial solutions.
P2P lending offers a perfect solution: borrowers get access to the money they desperately need, without having to turn to traditional credit institutions, which use extremely high-interest rates and strict conditions due to the crisis.
And all this while (experienced) investors make huge profits that no bank can match.
It is this mutually beneficial relationship between borrowers and investors that has ensured that the P2P community and market have experienced tremendous growth in recent years.
The peer to peer model has proven extremely successful. The global P2P lending sector, estimated at $ 3.5 billion worldwide in 2013 and $ 64 billion in 2015, is expected to be worth nearly $ 1 trillion in 2050.
The Indian P2P loan market for loans is expected to reach 4-5 billion dollars in 2023.
P2P loans will not disappear in the near future, and the sooner you start investing in this asset class, the sooner you will make good profits.
Most experts agree that the market will continue to grow, meaning that there will never be a return to the financial autocracy of the banking systems that applied before the financial crash in 2007.
It is therefore not surprising that more and more people are becoming interested in the world of peer to peer credit.