Do you know the best way to lose a peer? Ask him for money! But how about asking for money from a complete stranger?

The great recession in 2008 given the world economies a tailspin, leaving many traditional financing options almost dried up. But it has also opened a completely new market for others to step in.

Welcome to Peer to Peer lending!

A platform that matches strangers (investors with borrowers) on almost everything from business funding to debt consolidation and weddings to home appliances. It eliminates the middleman - traditional banks – to connect the investors with individual borrowers.

Why do we call banks – The Middle Man?

The banks stand in between two groups – Lenders and borrowers. If you have a savings account with the bank, it means you’re the lender, because the bank has borrowed this money from you. While at the same time, if you get a loan or even apply for a credit card, you become the borrower. Now, ask yourself, as a lender what rate you are being offered on your savings account? 4-6% p.a.? Is it justified! While, when you borrow money in the form of a loan, how much interest rate you usually pay? 15-18% p.a.?

 Where is this margin disappearing? The net margin i.e. the difference between the two is the way these banking giants are making profits!

Here Come the Disrupters!

P2P lending is reshaping the traditional banking means by which financial services are given to the consumers. Here your loan request is someone else’s investment! What you will be charged as an interest on the loan, will be someone else’s earning – the genuine returns. Lender and borrower’s get almost 100% of the value minus the service fee. So, no holding the margin.

These crowdfunding platforms are successfully catering on both the sides, with Fair Rates. At the same time, ensuring both the participants have a rewarding experience. Let’s understand how P2P lending is emerging as a remarkable new alternative asset class!

Delivering Value for Money

Investment in share need a good understanding of the markets, savings are safe but yields mediocre returns and bonds may pay out regularly, but it locks your money. Each of these traditional Investment Options has their fall-outs. On the contrary, P2P lending may provide a solution. The returns (i.e. the rate of interest on loans) range in between 12% to 36%p.a. It is far greater than the returns offered by traditional investment products. Also, the participant (lenders and borrowers) pay much lower service fees, than they would to another broker to park their money.

Beating Inflationary Pressures

Savings are good, but it is susceptible to the hidden risk of inflation, that gradually erodes the purchasing power of money. Thinking how? For instance, if you hold money in a savings account which yields 4% interest and the current rate of inflation is 5% per annum, so with each passing year, you will be losing 1% of the value of your saving. Unless you do something to stay ahead! Online Investment in P2P lending comes with compounding benefits. You can reinvest the returns every month, both principal and interest, as you receive the repayments. It is the best way to invest money. You can grow your funds exponentially, and counter inflation too!

The Hidden Truth of EMI nature of Returns

Peer to Peer Lending is a debt-based investment. It offers a fixed return over a fixed tenure with systematic repayment plan in the form of equated monthly installments (EMIs). By its very nature, a loan is a legal agreement between borrower and lender. It must be repaid.

In P2P lending, investors receive returns as soon as a borrower starts repaying the EMIs (principal + interest). It also means no lock-in period for investment to mature, unlike market-linked investment. You can any time withdraw your accumulated returns if you have an emergency.

Month after month, the EMIs will create a regular cash flow for the investors. It is a great way for investors to maintain a passive source of income. Thus, P2P lending fits well any retirement portfolio. The only risk is of loan default. For that, the loans are priced from low risk to high risk. You can diversify (up next) your portfolio to minimize the risk. Many investors choose to auto-invest their money.

Diversifying Risk

In P2P lending, a very well diversified portfolio is considered less volatile, it generates stable returns in the longer run.

As you know, in P2P lending there are primarily 6 risk buckets – Minimal risk, Low risk, Medium risk, High risk, Very high risk and Unrated category of borrowers. These risk buckets are nothing but the classification or pricing of individual P2P loans into a series of graduated risk. Each bucket is priced with an interest rate and default rate. Investors tend to spread their wealth across these 6 risk buckets, in a manner that it upholds a perfect balance. Your portfolio should neither be too heavily weighted towards one risk bucket nor too lightly weighted towards another. As said, the perfect balance is what needed here.

How can you do it?

1. Add a diverse mix of businesses into your portfolio

2. Lend to both individuals as well as businesses

3. Lend at various interest rates

4. Lend across varying loan tenures

If you think picking the right loan is a challenge then, it’s not! There is a ‘filter functionality’ on lender dashboard to diversify easily and efficiently. All you have to do is add the right filters, such as What interest rate? What tenure? Just keep on adding variety and you are all set with a well-diversified portfolio in a few minutes!