There are good reasons to consider P2P lending a decent source of passive income. 

It has been on the rise for a while now and there are financial experts out there with extensive experience in the area and impressive investment portfolios. 

So we’ve decided to pick their brain on P2P lending to be aware of all the intricacies. 

Let’s dive in!

What is P2P lending? 

Peer-2-peer lending (P2P) is a way to earn money online by investing in loans borrowed by individuals or businesses. 

In other words, you act like a bank that lends money and receives interest for it. The investment return from P2P lending is usually more attractive than the return of a savings account, for example.

However, in exchange you take the risk by giving your money out for loans to unknown people. 

In the majority of cases your investment will be allocated for simple consumer loans. 

Most common ones include buying a new car or a property, getting an education, covering medical expenses, etc. They may also be related to small business needs like purchasing some new equipment or covering repair costs. 

There are many reasons why borrowers are interested in P2P platforms rather than banks. 

Imagine, you need a loan. 

First, you collect bunches of documents, then go to the bank and answer probably uncomfortable questions. Finally, you wait for your application to be either accepted or declined. Altogether the process would have taken a few days or weeks. And, the chances you actually get the loan, — are not that high. 

Instead, thanks to P2P lending platforms, you can take a loan online anytime. Yet, the process does imply certain requirements and verifications as P2P platforms have processes in place to vet the borrowers and protect lenders. 

As an investor, you may see or not see where exactly your money goes. In short, it depends on whether the P2P lending service acts as the loan originator (lending company). 

If yes, you have access to the information on the borrowers’ loans. 

In other cases, a P2P website forwards your investment to a loan originator company that distributes it over the loans. You don’t receive any loan details, only the interest. 

The first pattern describes the “P2P platform” business model. The second one is a P2P marketplace. But for the sake of clarity, we are going to refer to all the P2P lending resources as the “P2P platform”.

P2P lending benefits 

The concept seems to be a win-win for both parties. 

If among other passive income ideas you are considering P2P lending investing, here are the benefits of p2p lending:

1. Completely passive. 

You manage everything from your computer. The interest earnings come in regular monthly installments. 

Many platforms also have mobile apps which makes the user experience even more convenient. 

2. Easy to start.

The smallest investment amount begins from €10. But before you get to this point, you’ll need to find out if you qualify to become an investor. 

Though the European Union is trying to establish some common regulations for all the EU-states, each country has its own laws.

They may require you to be of a certain age, maintain EU residence or citizenship, provide your income or tax reports, etc. 

3. Easy to diversify. 

The golden investment mantra says: “Diversify to reduce the risks.”

When you invest in p2p lending, there are plenty of opportunities for it. 

4. High returns. 

They range from 8-12%. Yet, do keep in mind the taxation policy of your country. 

For instance, in the UK there are tax breaks available on all P2P lending accounts. 

Moreover, one can open an IFISA, a specific P2P lending account, that is tax-free. You can read more about it here or google “P2P lending Europe” to know more. 

5. Buyback guarantees.  

In P2P lending buyback guarantees is a widespread policy aimed to protect the lenders. 

It’s an obligation to return the funds to the lender if the borrower delays the payments. If the repayment is late more than a specified period (as a rule, 60 days), the platform takes the responsibility to pay-back the loan to the investor. 

The majority of platforms follow this policy. But double-checking won’t hurt. 

Borrowers, on the other hand, enjoy the following advantages: 

1. P2P lending platforms offer lower loan interest compared to a bank. 
2. You can get a loan really fast. 
3. If you are a business owner, it may also be an advertising platform for your business. 

Is P2P lending safe? 

We are not investors ourselves but after researching on the topic we’ve come to the following conclusion: it is safe, if you do your homework. 

There is plenty of information out there to stay updated. Marco Schwartz’s blog, P2P Empire, Jean Galea’s blog, — are just a few examples of the resources to get the relevant news.  

Still there is always a chance that either the platform or the borrower goes bankrupt. You can read more on red flags to look out for here. 

Even so the good news is that you can reduce the risk by doing your due diligence when choosing the platform. Here is a checklist that may come in handy. 

1. Are there any reviews? What is the rating on TrustPilot?

Tip: Don’t limit yourself to only one resource like TrustPilot, for instance. 

Some P2P investors lead specialized blogs. You can find up-to-date information there along with their experience and feedback. 

2. Does the platform provide buyback guarantees? 

As mentioned earlier, it’s a guarantee that your funds will get back to you, if something goes wrong. 

For instance, if the borrower doesn’t pay the loan, your money will return to you within 60 days or so. 

3. What about instant liquidity? 

This term refers to the ability to access and manage your funds, once they are applied for a loan.  

In regards to P2P lending, instant liquidity option specifies if you have the right to withdraw your funds whenever you want. 

4. What’s the verification process for borrowers?

Thorough verification steps for borrowers mean thorough protection measures for lenders. 

Again this is something described in the platform’s policies and rules. 

5. Are there support contacts available? 

Communication with the platform will give an understanding how they treat their clients. 

Drop a line to the support with a question. 

You’ll see how responsive they are and if they can in fact provide any assistance. 

6. Have a look at social media and blogs. 

Normally, the team behind the platform keeps social media accounts active. 

They are also transparent about their top management. You may find links to their LinkedIn accounts and email contacts on the website. 

If they are open about it, it’s a good sign. It means they have nothing to hide and are trying to win your trust. 

7. Is there a license?

Verify if the platform has a license and the legislative regulations it falls under. 

Now you are aware of the major P2P lending risks and what you can do to avoid them. 

Once you take all the precautions, the next logical question is “How much should I invest in P2P lending?”. 

The best practice here is to start small and to go for short-term loans. And here are some platforms where you can do that. 

Top-rated P2P lending platforms

We’ve selected these platforms relying on the most often positive reviews made on specialized blogs. We don’t encourage you to decide against any of them. This is just an “FYI” on some of the major players on the market, for general understanding. 

Mintos 

• Country: Latvia 
• Min investment amount: €10
• Average yearly return: 10% – 12% 
• Buyback guarantees: yes 
• What else?
• Short-term loans available 
• Decent diversification opportunities 
• Straightforward for starters 

Twino 

• Country: Latvia 
• Min investment amount: €10
• Average yearly return: 10% – 14% 
• Buyback guarantees: yes 
• What else?
• Opportunity to diversify in real estate projects 
• iOS and Android apps available
• Referral bonuses 

PeerBerry 

• Country: Latvia 
• Min investment amount: €10
• Average yearly return: 10% – 12% 
• Buyback guarantees: yes 
• What else?
• Easy to diversify 
• High transparency 
• Ability to generate transaction summaries and tax statements 

Robocash 

• Country: Croatia 
• Min investment amount: €10
• Average yearly return: 10% – 14% 
• Buyback guarantees: yes 
• What else?
• Fully automated 
• Have been long on the market (since 2013) 
• Short-term loans available 
• Poor diversification 

Swaper 

• Country: Estonia 
• Minimum investment amount: €10
• Average yearly return: 12% – 16% 
• Buyback guarantees: yes 
• What else?
• iOS and Android apps 
• Short-term loans available 
• +2% loyalty bonus if you invest over €5,000

Summary 

P2P lending is a phenomenon that has changed the financial market. It’s an alternative that eliminates time-consuming bureaucracy for both lenders and borrowers.

If you’d like to build steady passive income via P2P lending, we advise going for a research first. Given what’s been said in this article earlier, the recommendations summary would be the following:

• get familiar with the P2P website policy, the legislation of the country where it’s registered. 

• check out the reviews of investors who have worked with the platform for some time. 

• get in touch with the platform, in case you have any questions (or even if you don’t). See how efficient their communication is. 

• start with small loans and diversify. 

Paul Samuelson, an American economist, once said:

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”

And he had a point.

Do you have any questions left? We are happy to help. Don’t hesitate to ask them here.