P2PIncome Shines a Spotlight on P2P Loan Types

P2PIncome - Understanding Loan Types

Investing in loans is a great way to earn a passive income. In exchange for the capital you provide to the borrower, you receive interest payments for some predetermined period of time. In addition, you might receive penalty payments, if and when the borrower is late with a scheduled payment, or is unable to pay the full amount.

What makes peer-to-peer lending so attractive is that you don't have to be a bank in order to issue a loan, nor do you need to provide the entire sum. Even if the borrower needs 10,000 euro and you only have 100, you can participate in the loan, offering your 1% in exchange for 1% of the earnings. That might not sound like a lot of money, but it adds up. That being said, it's important to understand the various types of loans offered on the many P2P platforms, and how those loans differ from one another in terms of risk and reward.

Some P2P sites deal in personal loans, which are loans given to a private individual. Often, the loan sum is small, and the risk-level is high, because such loans are rarely collateralized (i.e. backed by something tangible). That's why the interest rates on such loans tend to be quite high, often exceeding 10%. Business loans, on the other hand, are often collateralized, such that the lender can at least collect something of value if the borrower defaults. So when you lend a farmer money to help purchase a new tractor, you know there's always the option to confiscate the tractor and sell it. Similarly, a bridge loan to a large company is more secure than a personal loan to most online borrowers.

Real estate is yet another type of loan investment available via P2P. You can invest in a renovation or development project backed by actual property. For the duration of the loan, you collect interest payments, and when the project is complete, you'll collect your share of the rent, and when the property is sold off and you'll collect your share of the capital gains. The combined yield from interest, rental dividends, and capital gains can be quite high, often exceeding 15%.

On the other hand, perhaps you have a specific idea in mind, like helping independent film-makers, or encouraging green-energy policies. There are sites devoted to those causes as well, and on this page, you'll find all of the aforementioned loan types, as well as rarer types. You'll even find P2P sites devoted to charitable causes, where you get back only what you put in, but help out struggling individuals and promote important causes. On the other hand, if you're an investor with really deep pockets and you want to make large investments, you'll want to find sites geared to big investments.

Whatever the goal and whatever the loan type, you should never invest all of your money in just one thing. Diversify your capital along various platforms and various loan types. Return to this page often to learn about new types of loans and new p2p lending platforms.