P2P Investing: Advantages and Disadvantages of Peer-to-Peer Lending Platforms

The P2P financial model, also known as peer-to-peer lending, only began to take shape in 2005, when the first lending platform, Zopa, was established in the United Kingdom, allowing borrowers and lenders to connect directly online without traditional intermediaries such as banks. This model became extremely successful not only in the United Kingdom but worldwide. P2P investing reached Lithuania only about 10 years later, in 2014–2015. Over the past decade, this model has become so popular that it is now a very common form of alternative investing. In this article, we would like to explain in more detail what P2P investing is, how it works, its advantages and disadvantages, the potential risks, and provide plenty of useful advice.

What is P2P investing?

Some Lithuanians, especially those with less exposure to investing, may still wonder what P2P investing actually is. P2P, meaning peer-to-peer, is one of the alternative financing models that allows people who want to borrow and people who want to lend to do so directly, without using intermediaries such as banks. Lenders are often referred to as investors because they earn money by lending their funds, while borrowers are loan recipients; in P2P lending, they are individuals. Transactions usually take place on specialized online platforms where investors can lend their money to borrowers at a certain interest rate. Platforms generally provide investors with certain safeguards, and sometimes investments are secured by specific borrower assets (for example, a pledged car). Peer-to-peer lending platforms allow investors to choose the borrower – the individual to whom the money will be lent – as well as the investment amount, term, and even return.

How does P2P investing work?

Although the term P2P may sound complicated, investing itself is actually quite simple. All that both investors and borrowers need to do is find a reliable P2P lending platform. It is very important to consider the platform’s reputation and transparency, check reviews of completed P2P investments, and verify whether it holds a license.

Platforms generally operate according to a similar principle:

Individuals wishing to obtain a loan apply to a P2P platform for the opportunity to borrow;
After receiving an application, P2P platforms assess the loan risk, set the interest rate accordingly, and publish the necessary information on their website;
Based on where they want to invest, for how long, and at what interest rates, investors choose the loan they wish to finance from all those offered on the particular platform. On one platform, it is possible to invest in several or even dozens of loans, making this a great opportunity to diversify investments;
At the end of the agreed period, the borrower repays the debt and accrued interest to the peer-to-peer lending platform, which then distributes the money to the investors’ accounts.

P2P platforms often allow investments ranging from very small amounts – just one hundred euros or even a few dozen euros – to much larger sums.

P2P platforms are often confused with crowdfunding platforms because the principle is similar. However, peer-to-peer lending platforms invest in loans to individuals, whereas crowdfunding platforms invest in business loans. Some crowdfunding platforms, such as profitus.lt, secure investments with certain assets. Therefore, even if a borrower is unable to meet their obligations, investors may recover their investments from the proceeds of the sale of the pledged assets.

Advantages of P2P investing

P2P lending is a great alternative to conventional investing not only because everything can be done online, but also because of many other advantages. Of course, some P2P platforms offer more benefits than others, but let us review the main advantages of P2P as a lending alternative.

You can invest from just a few dozen euros. Some platforms allow investments of very small amounts, which makes it possible to diversify an investment portfolio widely.
Investment returns are often comparable to those of stocks. In other words, depending on your knowledge, experience, and chosen strategy, investing through peer-to-peer lending platforms can generate as much or even more profit than investing in stocks.
Investing in P2P does not require as much knowledge as investing in stocks and bonds. Loans on platforms are usually already selected, with their risk and potential profit assessed, so you do not necessarily need to conduct additional research, although doing so is highly recommended.
Easy diversification. Diversification means spreading investments in order to reduce potential risk. P2P platforms make it very easy to invest in several different loans at the same time.
For some borrowers, peer-to-peer lending is a much faster, more efficient, and more convenient solution, especially if they have a low credit rating or a specific borrowing purpose.
P2P platforms are very simple and easy to manage online from anywhere in the world.

As you can see, P2P investing has many advantages. However, where there are advantages, there may also be disadvantages, so let us discuss in more detail the drawbacks of choosing this alternative.

Disadvantages of P2P investing

There is probably nothing in the world that works perfectly. If something has advantages, it will inevitably have disadvantages as well. The only question is whether those disadvantages are significant enough to outweigh the benefits, or whether the advantages are much more substantial. Let us discuss the main potential disadvantages of P2P.

Higher credit risk. Credit risk on peer-to-peer lending platforms is considered somewhat higher than elsewhere because many borrowers have lower credit ratings. For this reason, it is particularly important to choose a P2P platform carefully – one that not only has a good reputation but also selects high-quality loans.
Lack of liquidity. Liquidity is the ability to quickly realize or sell an investment. P2P investments are not particularly liquid, so lenders’ money often remains tied up until the end of the loan term.
Risk of late payments. Lending money through peer-to-peer lending platforms also involves the risk that the borrower may be late in meeting their obligations, meaning you may not recover your investment and accrued interest on time.

In addition to these disadvantages, it is important to note that in some countries P2P investing is not strictly regulated and is therefore considerably riskier. Moreover, company regulations do not always permit the use of P2P services. Nevertheless, many of these drawbacks can be avoided simply by choosing a reliable peer-to-peer lending platform.

Risks and potential returns of P2P investing

Investing always involves risk. Sometimes it is lower, sometimes higher; some investments avoid it, while others, unfortunately, are hit hard by it.

Investors in peer-to-peer loans may face borrower solvency risk. In other words, the borrower may be late in repaying the loan or may fail to repay it altogether. If the borrower does not meet their obligations, the investor may lose all or part of the interest and, in some cases, part or all of the amount lent. Peer-to-peer lending platforms closely monitor the solvency of all borrowers and often refer the matter to bailiffs after just one month of late payment; once the debt is recovered, the money is immediately returned to investors.
Interest rates on P2P platforms are fixed for the entire loan term. This means that if you invest in loans with low interest rates, your profitability will be limited. In other words, you will be exposed to interest-rate risk.
Another risk you may encounter is an unreliable or unprofitable platform. If a platform goes bankrupt, investors’ existing loans would be transferred to another peer-to-peer lending platform. However, to avoid this risk, we always recommend choosing only reliable platforms that have operated in the country for several years, such as profitus.lt.
The global or national economic situation can also be considered a risk factor. If the global economy or Lithuania were to experience economic stagnation, it is likely that not only real estate prices but also returns on peer-to-peer investments would fall, while people would find it more difficult to repay their loans, leading to more delays and defaults.
Political risk is something that, unfortunately, we cannot control. Risk may arise if taxes on income received are increased or peer-to-peer lending requirements are tightened.

The good news is that risk always goes hand in hand with high returns. P2P investing generally offers the possibility of earning much higher returns than traditional saving or investment instruments, such as deposits. By investing in high-risk loans, it is possible to earn up to 16 percent per year, while choosing lower-risk loans may yield 8-12%.

Tips for getting started with P2P investing

As you have already understood, P2P lending is not a very complicated process. Even if you decide to invest for the first time, you can do so without much difficulty. To make the process even clearer, here are several tips on how to get started with P2P investments.

Open your investment account. A lender simply needs to create a profile on a peer-to-peer lending platform and open an account there, providing a username, password, email address, confirming their identity, and transferring money to their investment account, or investment wallet.
Choose which loans you will invest in and how you will invest. Consider whether you will invest regularly or whether you want to invest a larger amount in a single, longer-term loan. Peer-to-peer lending platforms often allow investment in both the primary and secondary markets, so this should also be considered.
Once you have chosen where to invest your money, remember that diversification – spreading your investments across several areas – can help reduce risk.
We recommend that beginners avoid loans offering the highest interest rates, because higher returns also come with greater risks.
Examine every investment offer carefully. Read the descriptions, analyze the data, and research the borrower.
Do not rush. We understand how attractive the opportunity to invest and create a source of passive income can be, but P2P lending should never be rushed. If you cannot find an investment you like, it is better to wait until the next day, when the offers are updated, than to invest blindly anywhere. Wait for an offer that meets your expectations and generates stable income at an acceptable level of risk.

These are just a few simple tips that can help you start P2P investing more safely, easily, and successfully.

P2P loans: more information

Another important thing to know is that P2P loans are granted only under certain conditions. Only adults with stable income not derived from social benefits may borrow, and their loan repayments may not exceed 40 percent of their total income. In addition, peer-to-peer lending is carried out only if the borrower meets the conditions and criteria established by the specific platform, if the borrower’s risk profile meets the platform’s standards, and so on.

Loans listed on a platform usually remain available for up to several weeks. They may be fully funded by investors; however, if the requested amount is not raised, all funds are returned to the lenders’ accounts and the loan is not granted.

Under the laws of the Republic of Lithuania, a P2P borrower has the right to terminate the agreement without penalties within the first 48 hours after the agreement is concluded. In such a case, all collected funds are returned to investors.

Investing on many investment platforms is free of charge or subject to only small fees.

It is also very important to understand that P2P investing, or peer-to-peer lending, is not the same as crowdfunding. P2P finances loans to individuals, whereas crowdfunding focuses exclusively on financing legal entities.

P2P peer-to-peer lending platforms

There are many P2P lending platforms around the world. Zopa, the first platform established in the United Kingdom and already mentioned in this article, still operates today. LendingClub, the largest and well-known U.S. platform, offers annual returns of 4–9 percent; Prosper, also established in the U.S., offers up to 10 percent; and Latvia’s Mintos offers annual returns of up to 12 percent. The crowdfunding platform Profitus, operating in Lithuania since 2018, invites investors to invest their money in real estate projects both in Lithuania and abroad.

Profitus vs. P2P investment platforms

Of course, in Lithuania you have probably heard the names of other peer-to-peer lending platforms as well. Profitus stands out because it focuses exclusively on real estate projects. Investing in real estate projects is a genuinely profitable and relatively safe way to earn additional income, as all investments are secured by real estate.

FAQ:

What advantages do P2P investment platforms offer?

P2P investment platforms allow investors to invest relatively small amounts, diversify their investments, and earn returns from loan interest.

What is the main risk of P2P investing?

The main risk of P2P investing is the borrower’s failure to meet their financial obligations. In such a case, the investor may not receive the expected interest or may lose part of the invested funds.

Which disadvantages most often surprise new investors?

The main disadvantages of P2P investing are limited investment liquidity, the possibility that borrowers may fail to meet their obligations, and non-guaranteed investment returns.

What most often causes a financing application to be rejected?

A financing application may be rejected due to insufficient borrower solvency, a poor credit history, or failure to meet the financier’s requirements.

How are peer-to-peer investment platforms rated based on user reviews?

Peer-to-peer investment platforms have become increasingly popular in recent years, and users generally rate them quite positively.