How Do Peer To Peer Lending Platforms Make Money?

Peer To Peer Lending

In the past decades, the popularity of peer to peer lending has increased exponentially, and studies have shown that it will become the priority lending and borrowing source in the future. But still, some individuals do not understand how this branch of alternative finance works and or how p2p platforms make a profit. Before exploring how these platforms make money, it is essential to understand what these platforms are doing. You might say that p2p platforms work to provide loans, but loans have been doing the same for hundreds of years. Suppose p2p lending is similar to banks; why more investors and borrowers are attracted to it. Now let’s dive into the details of working on p2p platforms and their way of making money.   

How Do P2p Platforms Work?

Peer to peer lending UK platforms is very different from banks. These platforms are also known as social platforms or marketplaces where individuals looking to increase their savings or better investment options can lend money to those looking to borrow. In return, lenders can get high-interest rates and can make it a passive income source. P2p platforms act as an intermediary and bring borrowers and investors to the same platforms. 

Investors only need to choose a platform, make an account and deposit funds. Then, they can start earning profit by lending money to individuals, businesses or property investors. They also provide an opportunity to the investors to invest through IFISA and earn tax-free returns. On the other hand, borrowers do not need to go to the banks; they can make an online application and get quick access to funds as compared to conventional bank loans. 

The growth of this alternative finance branch is due to those individuals who are tired of traditional financing methods. P2p lending services are safe and beneficial for investors and borrowers throughout the UK. 

What Fees Do P2p Platforms Charge?   

P These platforms charge fees from both the investors and borrowers. However, the fees that a platform generates depends on whether the individual using their service is an investor or borrower. A vast majority of p2p platforms do not charge any fee from the investors. This type of fee structure ensures that investors can make a substantial profit on their investment. As a result, p2p investment provides them with an excellent alternative to the traditional investment option. 

On the other hand, if you are a borrower looking to take out a p2p loan, several charges are attached to this process. The cost of borrowing varies from platform to platform. All the platforms compete with each other and try to offer low fees to attract more borrowers. If you want to take out a p2p loan, you should shop around to find a platform offering a loan at the best affordable rates. In most cases, p2p platforms charge two significant fees, which are as follows:

Upfront Fees

When taking out a loan through a peer-to-peer lending platform, you have to pay an initial set-up fee most of the time. This fee may be named differently by different platforms, but you can identify it by the factor that you need to pay it upfront. Platforms charge this fee as compensation for their services as they do all the hard work for you, from conducting checks on the lenders to sourcing a loan. 

The exact amount of fees you have to pay depends on the platform you choose, but it is usually quoted as a percentage of the loan amount. However, a recent study shows that these fees fall within a wide range; some platforms charge as low as 0.5%, while others charge up to 6%. Moreover, the fee structure also differs depending on whether a loan is non-underwritten or underwritten, so it is vital to check this before taking out a loan.                        

Ongoing Fees        

The second type of fee through which a platform makes revenue is ongoing fees. Throughout the span of the loan administered by a p2p platform, the platform always earns a margin on the interest rate charged from the borrower and paid to the investor. In simple words, investors do not receive the exact interest amount that is charged from the borrowers. P2p platform takes out a commission from this interest before transferring it to the lenders. For example, if a borrower pays 7% per annum, the platform may take 1% as their fee. The investor will receive 6% per annum as interest payment. Though the investor is not paying a fee directly, their profit is indirectly affected by this ongoing fees structure. 

How Do P2p Lending Platforms Generate Revenue?

One of the biggest things that attract borrowers and investors to peer to peer lending is the transparency of the platforms. Banks have heaps of paper works, complex and hidden fee structures and their level of hierarchy that causes investors and borrowers to find alternative financing sources. Simplicity and transparency are the significant features of p2p platforms. P2p websites have a dedicated page that explains fee structure, and they also go as far as to explain how they make money. Each platform has a slightly different fee structure and makes money through these fees to keep their business running.    

Bottom Line

Peer to peer lending proves to be an excellent alternative investment to IFISA that does not charge any fee from the investors directly. And make this method attractive for those looking for a low-cost way of making money. However, if you want to invest money in p2p loans, you must keep in mind that p2p platforms indirectly take a commission from your interest commissions. The fees of p2p platforms tend to vary from platform to platform. If you are a borrower, you should always shop to find a platform that charges low initial set-up fees. This way, you can get a loan at a low cost and easily repay it. The popularity and growth of p2p platforms are going to increase continuously due to seamless user experience and transparent fee structure.    

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