Peer-to-peer lending provides investors and borrowers various advantages over more traditional forms of finance. However, there’s a potential downside as well.
EstateGuru has taken a detailed look at the pros and cons of this form of funding, and the ways in which their platform aims to maximize the former while “attenuating” the latter.
EstateGuru writes in a blog post that P2P lending enables borrowers to loan funds directly from individuals, without the need for banking institutions or other traditional financial institutions. P2P platforms, such as EstateGuru, “assess loan applications from would-be borrowers, determine the risk involved in the venture and the credit rating of the applicant, and then either approve or reject them.”
As explained by the firm, successful applicants are “assigned an interest rate based on the criteria above and other factors.” If the applicant decides they want to accept the terms, their project is “published on the platform for users to consider, and potentially, fund.” The borrowers are “subsequently responsible for making periodic (usually monthly) interest payments and ultimately repaying the principal amount when the loan maturity date is reached.”
As noted by EstateGuru:
“One important distinction, when it comes to Estateguru, is that our loans are secured by a first-rank mortgage, meaning that our borrowers provide collateral in the form of real estate. This means our investors have first claim on the proceeds from the forced sale of the property in the event of a borrower defaulting. This is not an outcome we want, and it very rarely happens, but it’s reassuring to know nonetheless.”
As mentioned in the update, investing on a P2P platform provides an opportunity to earn significantly more interest when compared to a typical savings account or cash ISA, some of which are “barely able to keep up with inflation.” The risk and reward ratio, and the rates of return, are often “very alluring.” EstateGuru, for instance, provides users “an average annual return of just over 10%.” Conversely, thanks to their strict due diligence processes, the default rate for projects on the site is quite low, the company noted.
Another key advantage of peer to peer is “the opportunity to diversify your portfolio.” Putting your funds into several different investments “mitigates the risk of your funds being impacted by economic turbulence, or a business going bust.” EstateGuru provides users “the opportunity to diversify across multiple loan types, projects, and markets, allowing for greater investment safety.”
As mentioned in the update:
“P2P platforms carry out their own risk assessment protocols for loan applicants, to ensure that borrowers are creditworthy and operating in good faith. Appropriately comprehensive underwriting should include credit, affordability, identity, and fraud checks. Borrowers on the EstateGuru platform are pre-vetted to meet these and other strict criteria.”
Additionally, the majority of their loans are “secured by a first-rank mortgage.” In the event of a default, this collateral is auctioned with a view “to reimbursing [their] investors as quickly as possible.”
The update further noted:
“Typically, peer-to-peer loans are exposed to high credit risks, as some platforms provide loans for borrowers whose low credit ratings prohibit them from obtaining conventional financing. … EstateGuru’s selection processes are designed to protect our investors against the risk of a defaulting borrower.”
The company says it likes to remain conservative in “assessing the collateral provided by our borrowers and keep our Loan-to-Value Ratio at less than 70%, which further safeguards against losses.”
They added:
“P2P lending platforms and their users do not enjoy any form of government protection or insurance. Some jurisdictions have even gone so far as to prohibit P2P lending altogether. EstateGuru has operating licenses in Lithuania and the UK (FCA p2p lending license). EstateGuru is not regulated by the EFSA (Estonian Financial Supervision Authority), because according to Estonian law, a license is not required to connect borrowers with investors.”
To optimize your returns, it’s usually necessary “to commit your funds for a long period of time (typically a year at least),” the company explained while noting that if you’re looking to turn a quick profit, P2P may “not be the ideal choice.”
They also noted that EstateGuru recently introduced a secondary market on the platform, which “allows investors to sell their existing claims to other investors before they reach full maturity.” This feature “allows users to improve liquidity and earn profits on investments over a shorter period than 12 months,” the firm noted.
P2P lending can offer an accessible source of financing compared to more traditional sources. Banks and financial institutions are often not willing to back developers who can’t claim an very extensive track record, or issue loans when the amount is “not sufficiently high.”
In addition to working with large real-estate developers across Europe, EstateGuru says that it prides itself on “bridging the gap in financing left by banks unwilling to support smaller projects.”
According to the firm:
“Things happen faster online, and Peer2Peer lending is no different. Compared to banks, which are mired in protocol and procedure, P2p lenders are often faster and more flexible. EstateGuru, for example, provides financing without unnecessary admin, red tape, or waiting periods.”
They also shared:
“Comprehensive and responsive assessment is carried out by our team of multinational specialists, and we authorize loans on a daily basis. In fact, securing a property loan from EstateGuru is up to five times faster than traditional financial institutions.”
Some platforms, such as EstateGuru, enable borrowers to repay their loans “ahead of schedule without incurring a penalty.” EstateGuru provides flexible repayment terms so that borrowers may choose the schedule that suits them. Borrowers are also able to apply for several different loan types; bridge, business, and development, each tailored to address borrower requirements.
In addition to the interest rate charged on the loans, P2P platforms may “charge additional fees as well.” EstateGuru charges a success fee (around 2.5-4% of the funded loan volume) once funding has been “fully obtained and an annual administration fee in the range of 0.5-1%.”
If you’re not able to pay back a loan obtained from a P2P platform, then you might not receive the same protection as you would when borrowing via a more conventional lender, the company explains.