Peer-To-Peer Investing with Yield Bridge
Peer-to-peer investing (P2PI) is the practice of investing money in notes issued by borrowers who are requesting a loan without going through a traditional financial intermediary and who are unknown to the investor.
HOW P2P LENDING WORKS
As cutting edge as it sounds, the underlying concept supporting peer-to-peer lending has been around for centuries. The difference today is the practise is no longer limited to agreements between individuals who reside within immediate physical proximity to another. The proliferation of the internet has spawned online platforms upon which people can lend and barrow. This, in turn, has led to global opportunities for investing in peer-to-peer lending.
Platform aside, P2P lending is basically a transaction between two parties — the lender and the borrower. Lenders, also known as investors, are looking to earn a profit on the loan, while the borrower uses the funds for whatever purpose they deem necessary. In most cases, P2P lending is based upon fully amortizing, fixed-rate loans. Interest rates remain constant for the term of the loans and payments are made in equal installments according to set schedules.
Borrowers are rated according to their “credit grades”, while administration activities are handled by the platform including underwriting and proceed distribution.
Today given the mature nature of the peer-to-peer market, compelling propositions are readily available, with average annual returns above 10% being common practise.
Yield Bridge sourcing team continually analysis the market, with a focus on commercial loans and real estate. While we recommend keeping P2P ventures as a small percentage of your fixed-income portfolio, we firmly believe that value can be found within the sector. Speak with one of our Asset Managers today to discuss our latest recommendations.
P2P LOAN TYPES
In P2P lending, investors (lenders) provide capital to borrowers in exchange for interest payments, while online platforms facilitate the connection between parties, handle underwriting, and manage loan administration for a fee.
Personal Loans
Are the most common type offered by P2P platforms. These are generally used to consolidate debt, or finance home improvements and the like. The cap on personal loans is $35,000 on most sites. Yield Bridge avoids such propositions given the notable risks at play. With zero collateral being offered up to the lender, your investment will evaporate if a borrower defaults, especially if it’s early in the term of the loan.
Business Loans
Secured from P2P sites tend to have more relaxed requirements than those from banks. They also require less documentation. Still, they aren’t really a source of startup cash, as most sites require borrowers to have a track record of at least six months. Some platforms will lend as much as $500,000 in this area. These loans are often collateralized by a general lien on the business.
Mortgages & Refinancing
Offered by P2P platforms usually apply to owner- occupied residences — either primary or secondary. Applications for funds to purchase rental properties or buying into a co-op are usually turned down. Borrowers are asked to provide a 10% down payment and the purchase of mortgage insurance is not a requirement. Loan origination fees are not charged, and the cap is typically $3 million.
Key Takeaways
To get the most out of P2P investing, while minimizing risk exposure you may need to diversify your holdings and lean toward borrowers with the highest credit ratings and lowest debt-to-income ratios.
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Choosing the correct platform and sectors as paramount. Not all P2P lending platforms are equal. At Yield Bridge we do the leg work for you in terms of due diligence. All loans will be under-pinned by business or property liens.
01
High Yields
Without question, the single most attractive aspect of P2P lending for investors is the potential for higher yields. A carefully curated portfolio of loans can potentially earn 10% annually or better.
02
Monthly Income
Investors are paid every month when borrowers make payments on their loans. This means a solid portfolio of P2P loans can generate a steady stream of passive income.
03
Low Entry
A P2P portfolio can be created with a minimal amount of capital, making it one of the least costly forms of investing in which to participate.
04
Potential Defaults
The vast majority of P2P loans are unsecured, this means there can be little collateral backing them. This is where due diligence is vital. Yield Bridge solely focuses commercial and property backed loans.