You’ve heard the term “P2P loan” thrown around at cocktail parties, and seen snippets about it online. Maybe you even have friends swearing by P2P investing. But you’re just not sure you’re ready to invest your own money until you find out more about what a P2P loan involves.

P2P loans have been around for years, long enough for savvy investors to have learned methods for earning the highest returns possible with them, and most importantly, for keeping investments secure. This rapidly growing lending platform doesn’t seem to be going away anytime soon either, with just two of the world’s top lending groups having facilitated more than 12 billion dollars in loans by March 2015. It’s no wonder so many global lending clubs have formed, and so many investors are interested in P2P lending.

Learn how the P2P loan works, how it compares with more conventional investments, and why the P2P is currently a hot ticket for investors eager for higher returns.

Just What Is a P2P Loan, Anyway?

A P2P loan is a peer-to-peer loan that involves one person or business borrowing money from another person or group of people. Today, club investors once solely comprised of individual lenders have expanded to see financial institutions and advisors jumping on board.

Why Would This Type of Loan Appeal to Borrowers?

Today’s borrowers overwrought with debt are typically looking for credit card refinancing or debt consolidation. P2P loans offer an appealing option for individuals looking to undercut much heftier interest rates offered by banks and credit card companies. Simply put, today’s borrowers are looking for more affordable credit. P2P lending groups like BTCjam provide it, following a mission to offer affordable and accessible credit to borrowers the world over.

How Does a P2P Loan Benefit the Investor?

The genius of the P2P loan is that both parties involved in the transaction win, with the borrower benefiting from lower interest rates and the investor enjoying higher returns than anything available behind a bank’s brick walls.

In fact, according to Forbes contributor David Prosser, investors in the industry in 2015 saw returns amounting to more than four times what they might have made through a leading bank or building society over the same 12-month period. Looking at these results, it’s no wonder investors have increasingly turned to P2P loans as an attractive option.

How Are Borrowers Approved for the P2P Loan?

When you hear about individuals sniffing around for alternative ways of borrowing, it’s natural to wonder about their reasons and, more importantly, their credit rating. Luckily, the requirements for borrowing from a lending club are typically as rigorous as any you’d find at a conventional bank.

BTCjam combs through a prospective borrower’s digital footprint, credit rating information, income, and personal references in order to obtain an accurate credit score. Depending on the credit risk obtained from this data, a fair interest rate is then assigned to the borrower, with BTCjam’s prediction capabilities for assessing the risk of individual loans outperforming industry standards.

What Is the Risk to Investors if Borrowers Default on Payments?

As in any lending situation, there is always the possibility that borrowers will default. And with a default on payment, returns will naturally be impacted. The very reason P2P lending pays such high yields is to compensate investors for that inherent default risk.

While some may fear this risk and the impact it might have on their overall portfolio, Forbes contributor Marc Prosser urges investors to stay the course, applying the simple solution of diversification.

By spreading out money over several hundred loans, Prosser says each individual loan represents just a tiny fraction of an investor’s overall portfolio. This means that even in the event of some defaults, the loss is very small, and the rate of return still high. As such, Prosser says the P2P still proves to be a good overall investment.

If you’re not that savvy about how to diversify your individual portfolio, BTCjam has a convenient AutoInvest tool that takes care of the process, selecting and investing on the site’s listings automatically.

Can Investors Really Expect Success With P2P Loans?

P2Ps have proven time and again to outperform savings accounts, certificates of deposit, and high-quality bonds. The expected yields are so high that everyone wants in.

Marc Prosser’s interviews with major financial advisors revealed that even their most “safe-playing” high net-worth clients buy into P2Ps for the diversification these loans add to their overall portfolios.

Time has shown these experienced investors that when the chips are down in other asset classes, such as the stocks and bonds markets, their P2P investments are not necessarily affected, continuing to provide a good rate of return. Overall, Prosser says this means lower volatility for an investor’s portfolio. And once again, it means that the P2P loan is a good investment.