P2P (Peer-to-Peer) Lending Glossary

You could easily stumble upon some new terminologies as you go more into the realm of peer-to-peer investment. These terms can be applied to describe the loan types, the P2P platform's operation, and the investment procedure. In any case, you could be a little perplexed by them.

Having a webpage with all the P2P vocabulary is, therefore, very helpful whether you are a beginner in the P2P investment landscape or an experienced investor.

P2P lending glossary

Annuity Type Loan

The total average annualized return shows the average compounded gains or losses on an investment over a year. It shows the annual percentage increase or reduction in the investment's value throughout that period.

Anti-Money Laundering (AML)

The name "anti-money laundering" (AML) refers to the laws and policies put in place to stop criminals from making money illegally and hiding it as legitimate revenue using a P2P platform.

Auto Invest

You can invest in P2P loans using the helpful Auto Invest option of P2P lending platforms without deciding on the loans manually.

You must specify some loan conditions before investing in P2P loans, including loan period, loan amount, and more. If your account has an auto-invest function, all you have to do is leave your money there, and it will re-invest itself.

Borrower

A borrower is an individual or legal entity with whom the loan originator has signed a loan agreement.

Bridge Loan

A bridge loan is a quick loan to cover current obligations or wait until a permanent finance source is found. It offers the fast cash flow needed to accomplish a certain goal.

Bullet Type Loan

is a loan in which the loan interest will be paid periodically, with the principal amount being paid at the end of the loan period.

Business Loan

A business loan is used to pay for ongoing costs of the company, purchase certain supplies or equipment, or invest in business development tools.

BuyBack Guarantee

A buyback guarantee is a promise made to the investor by the loan originator that, if the loan is late by more than a predetermined amount of time, the loan originator will buy back the loan from the investor.

Cash Drag

Cash drag is a term used in peer-to-peer investing to indicate when there aren't enough loans in the primary market to invest in or when your investment requirements are too restrictive. 

Consumer Loans

Consumer loans are loans intended solely for consumers, not for use by businesses. They are also referred to as personal loans and are evaluated based on a person's credit score.

Cumulative Investments

The phrase "cumulative investment" refers to all investments existing on a platform during a given time frame.

Default Rate

The default rate is the percentage of borrowers that fail to repay their debts. It's determined by the ratio between defaulted loans and the portfolio's value. A low default rate indicates that people are making their payments, whereas a large one indicates that many aren't paying back.

Development Loan

The development plan is a loan to pay for a project's planning or building phases.

Diversification

The practice of diversification involves combining several types of assets within a portfolio.

Due Diligence

To ensure everything is accurate and up to code, due diligence is the procedure of inspecting and analyzing the information provided by the loan originators. 

Expected Return

The expected return on an investment is the amount of interest the investor anticipates earning.

First ranking mortgage

Lenders who hold first-ranking mortgages are entitled to the first portion of the revenues from the property's forced sale.

Funding Volume

The funding volume includes the sum invested by investors and distributed to borrowers. It's the sum of investments divided over a specific period.

Grace Period

The grace period is a time frame after the initial due date for the borrower to pay the debt established with the lender or loan originator. It won't be a delayed loan payment during this time period, provided the borrower makes a payment by the new due date that was mutually agreed upon. 

Group Guarantee

There can be a Group Guarantee in addition to the regular guarantee. Loan originators occasionally have parent firms with greater financial resources instead of being a single organization. This means that the parent firm assumes responsibility for any liabilities if the loan originator is unable to fulfill the guarantee and repay all loans. This increases security if the parent firm has the resources to do so.

Hands-off Investing

A process called hands-off investing includes making investments without actively managing your money. More passive investors tend to set up their investment portfolios and make only minor adjustments over time.

Hands-on Investing

Actively managing your money while actively investing is known as hands-on investment. Hands-on investors would rather spend their time in loan selection, research, and due diligence using the auto-invest tool.

Indirect Structure

In P2P lending investments, an indirect structure indicates a specific investment structure, including a platform, a borrower, a loan originator, and a particular purpose entity. The special purpose entity "owns" the loans instead of direct structures, which resell them to investors through the platform.

Installment Loan 

An installment loan is a loan that must be repaid over a certain number of periodic payments or installments.

Institutional Investor

An institutional investor is a firm or organization that invests funds in the name of others.

Interest Rate

The percentage you earn on your original investment is your interest rate. You will profit more from your investments at a higher interest rate. Over time, the interest rate you charge borrowers is what they pay each month additionally.

Internal Rate of Return (IRR)

IRR is a measure that is used to calculate the profitability of possible investments.

Invoice Financing

Businesses can borrow money using invoice finance as collateral for the amounts owed on their customers' outstanding invoices. When a company provides a client or another firm with a good or service, it frequently does so on credit in the manner of an invoice within a certain time frame until the payment is due.

Liquidity

A measure of liquidity is how simple it is to recover your invested capital. While assets like cash and equities are seen as more liquid, investments like real estate are relatively illiquid.

Loan Agreement

Every time you make a loan investment, you must sign a contract known as a loan agreement. Every time you invest in a loan, you can read it.

Loan Originator

A loan originator is a lending institution that acts as a creditor and has given the P2P platform permission to transfer the loan originator's claims to the borrower using the platform and to act on the creditor's behalf to take other actions outlined in the Agreement and the in accordance with the terms of the co-operation agreement that was reached between the creditor and the platform.

Loan-to-Value (LTV)

LTV is the ratio of the loan amount to the market value of the collateral. 

Loyalty Bonus

Certain P2P networks reward investors who make a particular amount of initial investment with loyalty bonuses.

Manual Investing

An investment approach known as manual investing entails making human decisions to manually choose, enter, and exit each loan for one's portfolio. It differs from automated investing in that it is not programmed to look for loans according to predetermined parameters.

Maturity

A financial instrument's maturity is the predetermined day the borrower must repay it.

Net annualized return (NAR)

NAR analyzes the real rate of return on all of your investments since you first joined a P2P lending platform like Lonvest. It comprises everything that impacts your returns, including campaign awards, defaults, and restrictions.

Payment Schedule

A payment schedule outlines the agreed-upon timing of payments from one agreement participant to another. The loan will mature after the payment plan.

Peer-to-peer (P2P) Lending

P2P lending investment essentially allows you to take on the role of a bank by lending money to others who then return it to you with interest.

Primary Market

A primary market is where investors buy shares or loans directly from a platform.

Principal

The initial sum of a loan is known as the principle. Your invested principle and the agreed-upon interest rate are used to determine your earned interest, also known as return on investment.

Return On Investment (ROI)

A financial ratio called return on investment (ROI) is used to determine how much an investor will profit relative to the cost of their investment. It's measured as a percentage of net income to investment costs. Your ROI will normally consider the collected interest payments and other benefits and losses in P2P lending.

Reverse Auction

In a reverse loan auction, each lender establishes the lowest interest rate they are ready to receive from that borrower. The lender or lenders that are willing to provide the lowest interest rate fund the loan.

Secondary Market

Investors purchase and sell assets they already possess on the platform on the secondary market. You can quickly obtain liquidity by using a secondary market to sell your assets early.

Secured Loan

Secured loans are either business or private loans that demand using a valued asset as security. Your home or vehicle is the most popular collateral for secured loans.

SEPA transfer

SEPA, or Single Euro Payments Area, is the most recent format for international bank transactions in the Euro. Thanks to SEPA, international Euro transfers inside the region are intended to be on par with domestic transactions inside your own country, thanks to SEPA. 

Skin In The Game

Skin in the game is the percentage of issued loans that a loan originator holds in the portfolio. 

Transaction

A transaction is an arrangement between a buyer and a seller to trade products, services, or financial instruments.

Unsecured Loan

Unsecured loans are those for which there's no security behind. This indicates that there won't be any property that could be utilized to pay back the loan if the borrower fails to pay. Unsecured loans carry a higher level of risk but also provide larger profits.

XIRR

A financial function called XIRR returns the (IRR) for a sequence of irregularly spread cash flows.

Yield

Prior to deducting any expenses, the revenue from an investment in peer-to-peer lending is considered a yield. A percentage represents yield, measured yearly or as the lender's anticipated total profit at loan maturity. The yield often corresponds to the loan IR.