When you think about asking for financing automatically, the idea of going to a bank comes to your head, but times have changed and it is no longer necessary to go to a financial institution to obtain capital. We tell you what they are and what are the loans between people with whom you can get from a loan of 1,000 dollars to a loan of 40,000 dollars.
What are loans between people?
Loans between people, also known as P2P or loans between individuals, are based on crowdlending , that is, they are credits that are offered and granted through online platforms that connect users who need financing with investors who want to take out profitability of their savings through the interest they can obtain on the capital they lend.
These types of loans without banks allow, on the one hand, that users who need capital can obtain it and, on the other, that investors can make a profit from their savings by investing in our project or idea based on our risk profile.
How do they work?
When the loans between people are requested, the crowdlending platform will carry out a credit analysis according to our credit purpose and our profile, and based on this we will be assigned a level of risk.
According to our level of risk we will have more or less interest and it will be the investors who will decide if they want to invest their capital in our project or not. The risk levels established by the platform range from the AA (very safe) and go down to the worst level and the one that implies the highest risk, the HR (High Risk).
What are the interests of loans between people?
Normally, the interest rate applied in the P2P is usually similar to that of the conventional loans of the banks, between 6% and 12% APR on average, although the crowdlending platform has a particular way of establishing the interest rate; It will be assigned according to the level of risk assigned to us by the same platform, so when higher level of risk, higher interest we will have to pay, although always within limits. For example, interest can vary from 0.5% monthly (if we have a very low risk level) to 30% (if we have a very high risk rating).
Other factors that also influence the interest to be applied are the amount requested, the repayment term, guarantees or guarantees, the purpose of the loan … etc
This system for establishing interests arises because the platform must give guarantees to private investors and must control the possible risk of default. Therefore, the greater the risk of default, the greater the return the investor will obtain, and conversely, the greater the security, the lower the return.
Some platforms also offer a reverse auction on credits so that applicants can get the best possible interest. In this auction the lenders contribute a part of the capital and determine to what interest they are willing to grant it. Thus, applicants place bids in order to obtain a loan with the capital they need and with a cheaper interest.
Do they have any cost?
Apart from the interest that has to be paid for the amount borrowed, there are other series of costs derived from loans between people .
Once our project is approved, we will have to pay the costs of studying and managing our application to the platform. It is a type of opening commission that normally ranges between 0.5% and 5% and may be higher or lower depending also on the level of risk assigned.
Are they reliable?
The answer is yes. These types of platforms are regulated by the Bank of Spain and the National Securities Market Commission. Although in the case of the second agency, some approvals are still pending, so although most of the platforms are already validated and with everything in order, some are still on the waiting list for the procedures required.
Who can invest in these platforms?
Any individual or company that wishes to monetize their savings can invest in a crowdlending platform. Being a loan investor without banks is simple, the first thing you should do is create an account on the platform, transfer the amount of money we want to invest and choose those projects that may interest us.
The amount of money we can contribute is limited by law. Law 5/2015 for the promotion of business financing limits the maximum investment that each lender can contribute. In addition, this law distinguishes between accredited and non-accredited investors:
Not accredited : refers to private investors who are not professionals in the sector. The limitation in this case is a loan of 3,000 dollars per project and up to 10,000 dollars per year.
Accredited : they are professionals and have no investment limit per project or for the annual total.
The fact that this distinction is made from the limits between accredited and non-accredited is to assure non-professional investors and prevent them from taking too much risk. In any case, an individual can become an accredited investor if he wishes, if he fulfills a series of characteristics.
How to become an accredited investor?
We can become accredited professionals to invest in P2P if we meet a series of requirements and conditions established by law. We should only be able to demonstrate that we have sufficient equity and knowledge to become accredited investors of this type of platform. There are different conditions depending on whether you are a natural person or a legal person.
In this table we show you some of the necessary requirements to become a professional investor depending on whether you are a private individual or a legal entity. In the case of being a natural person, only by fulfilling one of the conditions can you become accredited, and in the case of a legal person you must meet at least two of the three conditions shown in the table.
Advantages for applicants and lenders
In addition to being a simple and quick way to access financing, they can offer a different set of advantages for both applicants and lenders who provide capital.
In this table we show you what are the advantages for both parties of this type of financing.
Obviously in order to benefit from the advantages, it is necessary to make responsible use of loans between people. That is, if we are applicants, we must provide real information about our profile and our project and only make use of a credit if we are sure that we can return the money, and if we are lenders, it would be convenient for us to lend a capital that we can do without, since it always implies a certain level of risk.