Started in 2005, and sometimes referred to as an alternative method of financing, peer to peer lending refers to online platforms which connect individual borrowers to investors who will lend money. As with any personal loan, borrowers are usually required to make periodic payments of principle and interest. The online P2P platform reviews applicants credit, originates the loan, collects payments and returns the money to the lender. In effect, the platform is the matchmaker/intermediary that connects the borrowers to the lenders. Peer to peer lending is also known as crowdlending, social lending, etc.
The borrowing process involves the creation of an application with the lending platform, which sets the rate and conditions for carrying out transactions and submitting a loan application to be assessed for creditworthiness to avoid the risk of defaulting. For lenders, they must also create an account and deposit funds from their bank account with the platform. Once a lender has provided funding to the platform they can begin investing in loans to individual borrowers.
Some P2P lending platforms include; Zopa, Kiva, DoFinance, LendingClub and Prosper. Peer to peer lending can be categorized into the following types of loans:
• Business loans: Loans sought to facilitate a business venture at a relatively reasonable interest rate and a simple application process with business assets as collateral.
• Individual loans: This is an avenue for obtaining personal loans meant to solve personal exigencies such as home improvements, car loans, debt consolidation, etc. It is one of the most common loans from lending sites.
• Student loans: Loans for financing or refinancing the educational programs of students. These loans are available to students to fund their education.
• Medical loans: Loans to individuals who are in need of medical attention and cannot otherwise afford to pay for it.
• Other Loans: This category includes auto loans, bad debt loans and real estate loans.
Advantages of P2P Loans
• Reasonable interest rates: P2P lending offers a higher return to investors than other types of fixed income investments or interest paid by banks. The borrowers enjoy a reasonable interest rate which is often lower than a bank will charge, if they can even get a bank loan.
• Avenue for investment diversification: P2P lending offers you an opportunity to spread your investment across borrowers in order to limit the risk of loss resulting from incidents of loan defaulting. It allows you to choose the kind of business to invest in to yield higher returns if you desire.
• Convenience: The platforms provide a convenient online way to apply for a loan or invest money while sitting in your own home. Account setup and transactions for both borrowers and investors can be completed within minutes.
• Low administrative charges from platforms and possible tax exemption from government allow you full enjoyment of your investment.
• The automated system leads to more investment opportunities to earn passive income as your investment grows. Most platforms allow investors to set parameters and have their money automatically invested.
The P2P lending platform also has its disadvantages. Here are some of the disadvantages:
• Risk of loss arising from payment defaults by borrowers.
• Inaccessibility of funds until borrowers make payments.
• Poor regulations due to a lack of legislation to back the scheme in some countries.
• Risk of P2P site’s crashing or going bankrupt.
Looking ahead, P2P lending platforms have great potential for the future and with support by governments around the world, P2P might soon become commonplace in many countries. For investors, there are many new resources for peer to peer lending investing. For borrowers, these platforms will continue to expand their share of the personal and business loan markets.