Peer-to-peer lending offers many benefits to investors and borrowers. One great thing about peer to peer lending is that it provides a wide variety of loans in which you can invest. You can choose different borrowers profiles, including individuals and businesses, different loan structures, and countries as an investor. Therefore, it is essential to diversify the p2p platform across various types of loans, lenders, and investment platforms. However, it is crucial to balance this diversification against achieving the best returns. Other than that, there are several factors that you should consider, such as available loans, quality of investment platform, target duration, and currency. Considering all these factors, we find that, currently, bridging loans are the best opportunities available for p2p investors.
Here in this article, we will describe how bridging loans can be the best loan type to add to your p2p portfolio. But first, let’s see what a bridging loan is.
What Is A Bridging Loan?
A bridging loan is a short-term loan that is usually secured against a property. Following are some common scenarios in which people take out such loans:
- These loans are used by property investors who want to buy a property and then sell it after a small amount of time, usually after doing some renovation to increase its value.
- Business owners are frequent users of bridging loans. They need to raise cash in a short time to grab limited business opportunities and expand their business. A bridging loan offers them quick access to funds to meet current financial obligations.
- A real estate buyer may find an attractive opportunity but does not have enough cash to complete the purchase. A bridging loan provides funds until they secure a long-term fund. Moreover, people use bridging finance to complete the purchase of a property before the sale of existing property.
How Can A Bridging Loan Be A Great P2p Investment?
Here are some reasons that help you understand how bridging loan proves to be a great peer to peer lending investment:
The returns of bridging loans range from 7 to 12%. From our point of view, it is an attractive return compared to other p2p loans. Bridging loans carry lower risks than development loans. Because in a development loan, you do not know whether the building will be constructed successfully and sold at its expected value or not. However, the Reuters on bridging and development loans are much similar. In terms of risk, we can say that bridging pans are more attractive.
Another benefit of investing in bridging loans is that it is secured against a valuable ` asset of the borrower. If borrowers default on a loan, you can sell the property of the borrower to get your money back. Due to the chances of repossession of the property, the rate of default loans is reduced.
Ideal Loan Lengths
Bridging loans are short-term debts and usually last for 6 to 12 months. It is an ideal loan length for most peer-to-peer lending investors. This time is enough to earn a reasonable interest rate without locking your money for a more extended period.
Most bridging loans come with a loan to value ratio of only 70%. This is because there are still the chances of losing money when the value of the property falls, and it can not be sold at an expected value. However, a conservative pr moderate loan to value reduces this type of risk in case of borrowers default and repossession of property.
Reliable Collateral Valuation
Typically, the collaterals used in bridging loans are residential property. That is why it is easier for investors to carry out a valuation of such property. In addition, there is a large amount of data available about a residential property on the online real estate portal.
Collaterals Are Often Renovated
Some people take out bridging loans for the renovation of a property. In this case, the value of collateral increases, and the chances of risk for the lenders are reduced. It also reduces the risk of borrower default because borrowers always want to protect the property in which they have invested money.
Reliable Borrowers With Track Record
The borrower who wants to secure bridging finance is often asset-rich and cash-poor. When borrowers have large amounts of valuable assets and high net wealth, the likelihood of defaults is reduced. Such borrowers always want to find the means to repay the loan on time to maintain their credit score. Moreover, some borrowers are repeat customers of peer-to-peer lending platforms. It means you can quickly check the track record of borrowers. It helps you to choose borrowers who can repay on time.
We hope that now you know the importance of making bridging loans a part of your peer-to-peer investment portfolio. There are several peer-to-peer lending platforms present in the UK. Some platforms offer a single type of loan, while others offer you a huge variety of loans. You must choose a platform through which you can invest in different types of loans to diversify your portfolio and earn high returns.