Peer to peer lending has become very popular among businesses due to its benefits to both borrowers and lenders. You may have heard about p2p loans but do not completely understand them. Traditional loans like property loans and personal plans are common, and people know more about them. However, P2p loans and bridging loans are relatively new funding sources and are designed to provide ease and flexibility to the borrowers and lenders. To help you make better financial decisions, we think it is essential for you to learn about peer to peer loans and bridging loans. This guide will help you learn about these two loan types and the difference between them.
What is a P2p Loan?
Peer to peer loans are the loans that you can take directly from the lenders instead of going to any traditional financial institution or banks. P2p lending takes place through online platforms, which act as a middleman and take care of all the processes. These platforms charge fees from lenders and borrowers to run their businesses. P2p lending is considered an excellent alternative to traditional investments because it offers high returns to borrowers. On the other hand, borrowers can also get interest rates lower than standard bank loans.
How Do P2p Loans Work?
A p2p loan can be funded by a single lender or multiple lenders pooling their money to fund a large loan. If you want to take a p2p loan, choose an online platform and make an application. Provide all the necessary information such as your name, address, income, loan amount, and loan terms. The platform analyses your application and then gives it a grading depending on your credit score and affordability. After that, if a lender finds your application suitable and approves your application, funds are transferred to your account immediately. You have to repay the loan amount and the interest rate in weekly or monthly instalments. Usually, the borrowers are individuals and small businesses.
On the other hand, if you want to invest in p2p loans, you have to create an account as a lender and deposit funds. You can choose loans according to your risk tolerance and earn high-interest rates compared to other investments.
Types Of P2p Loans
In the beginning, p2p platforms only offered personal loans that could be used for any purpose and did not require any collateral. However, with the increase in demand, these platforms enhanced their services to facilitate borrowers from different sectors. Following are three main types of p2p loans:
These are the most popular and old type of p2p loans, which provides you quick access to funds to fulfil your financial needs. Personal p2p loans are unsecured loans which means you do not need to use any of your valuable assets as collateral. You can easily secure a loan if you have a good credit score. This type of loan is beneficial for borrowers, but the investors have more risk in it. As there is no collateral, there are more chances of losing money. If a borrower defaults, you may lose all your money because there is no security.
P2p business loans provide an excellent opportunity for the growth of startups and small businesses. Most traditional lenders and banks do not offer loans to startups and small companies and have strict criteria. P2p platforms offer flexible and easy to meet eligibility criteria to facilitate small businesses. In addition, these can be secured and unsecured and offer a lower interest rate compared to other commercial loans.
Now, p2p platforms offer loans for property developers or investors, which are known as property loans or p2p bridging loans. These are secured loans, and if you want to take out a p2p property loan, you have to use a valuable property as a security against the loan. As a result, these loans carry fewer risks for investors, but borrowers have a risk of repossession in case they do not repay the loan amount on time.
What Is A Bridging Loan?
It is a type of short-term loan that works similarly to a p2p property loan. The similarity between these two loans is that they use the value of the property as collateral. It is a reason that many people consider them the same things. Bridging loans act as a bridge when you need funds but are waiting for a long-term loan to be available. You can use bridging finance to fulfil your immediate financial needs and can repay it once you secure a long term loan.
How Does A Bridging Loan Work?
You can easily understand the working of bridging finance by an example; if you want to purchase a new property but are waiting for funds to become available by the sale of existing property. In this situation, a bridging debt can provide you with funds to purchase a property, and you can repay the loan amount by the sale of the existing property. Typically, this loan ranges from 6 to 12 months, and you have to pay the full amount after 12 months.
Types Of Bridging Finance
There are two main types of bridging finance:
Open Bridging Loan
These types of bridging debts do not have any specific or fixed repayment date. However, you have to repay the loan within one year. Lenders consider these types of loans riskier, so you have to pay high-interest rates. It is the best option for those who have monthly cash flow issues as they can repay the loan amount at the end of loan terms.
Closed Bridging Loan
These types of bridging debts have a fixed repayment date. If you do not repay the loan amount on time, you have to pay late repayment fees, and in extreme cases, there are chances of repossession of your property. These loans give fewer chances of default and come with a lower interest rate compared to open bridging loans.
How do P2p Loans Differ From Bridging loans?
Here are some differences between p2p and bridging loans:
- The target audiences of both loans are different. P2p loans target small and medium enterprises, while bridging debt targets property investors and homeowners.
- The interest rate payable is different for both types of loans. In p2p loans, you have to pay a monthly interest rate. However, bridging finance offers different ways to pay interest. You can either pay at the end of loan terms or monthly according to your personal circumstances.
- Loan providers are different for both bridging and p2p loans. Accredited leaders offer P2p loans, and whole bridging loan is usually offered by the banks or bridging finance lenders.
We hope that now you understand p2p lending and bridging loans and can make an informed decision whether these are suitable for you as an investor or lender or not,