How do P2P platforms get paid?

How do P2P platforms get paid?
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How do P2P platforms get paid?

Reading Time: 4 minutes

The popularity of P2P lending has grown exponentially over the past decade, with the global market currently valued at over $67 billion. What’s more, the P2P lending market is projected to showcase a compound annual growth rate of 29.7% from now until 2027. However, many people still don’t understand how this branch of alternative finance works – or how the P2P platforms themselves get paid.

In order to help demystify this service, this article explores how P2P platforms get paid. We’ll break down how these platforms work and then dive into the different fee structures offered, ensuring you have all the information you need before entering the P2P lending world.

How Do P2P Platforms Work?

First things first – let’s explore how P2P platforms function before breaking down how they make money. P2P (peer-to-peer) platforms offer an exciting and seamless investing or borrowing experience that aims to rival the services provided by traditional banks. As the name suggests, P2P platforms help connect investors and borrowers together directly, eliminating the need for a financial intermediary such as a bank. Through this P2P process, investors can earn a substantial return on their capital, whilst borrowers can obtain a loan much more seamlessly than with a bank.

The growth of this area of finance has been bolstered by consumers growing tired of ‘traditional’ methods of financing, combined with the increasingly digital nature of the finance industry. P2P services, such as the ones offered by Lendermarket, provide a safe and mutually beneficial arrangement for investors and borrowers in countries throughout Europe – all without having to attend any physical location!

What Fees do P2P Platforms Charge? 

However, as excellent as this process sounds, it’s understandable that there will be questions about how these P2P platforms receive compensation for their services. Ultimately, the fees that P2P platforms generate will depend on whether the consumer is investing or is borrowing. If it is the former, the vast majority of P2P companies (Lendermarket included) will not charge any fees to invest in P2P loans. This fee structure ensures that investors can generate a return on their capital in a low-cost and streamlined manner, providing a viable alternative to ‘traditional’ mediums.

On the other hand, if a consumer is looking to receive a loan through a P2P platform, then most of the time, there will be specific fees attached to this process. The exact costs will depend on the company, leading to platforms undercutting each other or offering alternative fee structures to attract borrowers. However, in the vast majority of cases, there are two main fee types to look out for:

Upfront Fees

When receiving a loan through a P2P platform, most of the time, you will be charged an initial ‘setup’ fee. This fee may be called a different name depending on the company, but the key identifying factor is that it will be charged upfront. P2P platforms will charge this fee as compensation for their services, including sourcing the loan for you and conducting checks on the lender.

The exact amount charged for facilitating the loan will vary from provider to provider, but most of the time, this fee is quoted as a percentage of the loan amount. A quick search online will show that these fees fall within a broad range – some platforms may charge as little as 0.5%, whilst others charge up to 6%. Furthermore, platforms may offer different fee structures depending on whether the loan is underwritten or non-underwritten, so it’s wise to double-check this beforehand.

Ongoing Fees

The second fee type that is usually charged by P2P platforms is ongoing fees. Typically, fees generated in this manner will be through the ‘spread’ on the loan’s interest rate. To put this simply, the spread is the difference between the interest rate that the borrower pays and the interest rate that the lender receives.

For example, if a borrower receives a loan and pays an interest rate of 5% per annum, then the P2P platform may take 1% of this interest for themselvesas their fee. Thus, this means the lender only receives 4% per annum in interest payments. So, although the lender is not directly paying a fee, they are indirectly affected by this spread-based structure.

What’s The Verdict on P2P Platform’s Fees?

The bottom line is that most P2P platforms will not charge any fees to investors directly, making this method of investing particularly attractive to those looking for a low-cost way of making a return. Compared to other asset classes, such as index funds and equities, P2P lending can offer an avenue to consistent and safer returns whilst avoiding the fee types associated with these assets, such as commissions and monthly account fees.

If you are an investor, it’s a good idea to weigh up your options to ensure you receive the highest return on your capital. As noted earlier, at Lendermarket, we do not charge any fees to lend your money on our platform – with no hidden administration fees charged either. Furthermore, our interest rates are clearly stated on our Loan Listings page, ensuring you know exactly how much you’ll receive when investing your capital with Lendermarket.

How Do P2P Platforms Get Paid – Summary

As this article has highlighted, P2P platforms operate through a different business model than traditional finance entities, offering an alternative way to meet your investing or borrowing needs. The fees that P2P platforms charge tend to vary depending on the provider, although they usually remain attractive – particularly for investors. Through transparent fee structures and a seamless user experience, P2P platforms look set to continue growing in popularity as we progress through 2021 and beyond.

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