Peer-to-peer (P2P) lending platforms is now growing in popularity. They are online investing platforms that match people or companies looking to lend and borrow allowing them to make direct arrangements between one another.
Providing intermediary services, these platforms perform the relevant due diligence risk assessments and credit checks that often include with fee charges for their services but are not part of the final lending agreement.
Some notable P2P lending platforms in Australia are RateSetters, MoneyPlace, SocietyOne, etc.
P2P lending system websites connect borrowers directly to investors (lenders), setting the rates, terms, conditions and enables the transaction. People use P2P lending services for a variety of reasons, such as for auto loans, home renovations, debt consolidation, small business loans, and many more.
These platforms are far better than what they can get from credit cards or personal loans from traditional banks.
The system and benefits of P2P lending platforms
A form of direct lending of money to individuals or businesses, peer-to-peer (P2P) lending also called person-to-person lending or social lending has no official financial institution involved in participating as an intermediary in the deal, matching lenders (investors) with potential borrowers.This lending system is generally done through online platform that match lenders with potential borrowers.
One benefit about P2P lending is that borrowers can get loan offers from lending websites at better interest rates compare to traditional banks with overhead costs since peer-to-peer lending companies generally operate online.
Investors get to see and select exactly which loans they want to fund.
Offering both secured and unsecured loans, most of the loans in P2P lending are unsecured personal loans. Secured loans are rare for the industry and are usually backed with luxury goods.
The following are the general steps in P2P lending process:
- First, a potential borrower obtaining a loan needs to complete an online application on the peer-to-peer lending website.
- Second, the lending platform assesses the application and determines the risk and credit rating of the applicant. The applicant is eventually assigned with the appropriate interest rates.
- Third, once the application is approved, the applicant receives the available options from the investors based on his/her credit rating and assigned interest rates.
- Fourth, the applicant can now evaluate the suggested options available and choosing one of them.
Lastly, the applicant is deemed responsible to pay periodic (typically monthly) interest payments and repaying the principal amount once it reached maturity.
Benefits and fallbacks
Some benefits of P2P lending are:
- Higher returns to the investors relative to other types of investments.
- For both lenders and borrowers,P2P platforms are more agile, efficient and transparent to deal with than traditional banking institutions.
- Great option to diversify the investment portfolio of the investors much less likely to be affected by economic turbulence.
- More accessible source of funding for some borrowers than conventional loans provided by financial institutions.
- P2P loans have lower interest rates for borrowers due to competition between lender with lower origination fees.
- P2P platforms offer high level of security for lender’s investment.
- Lenders can withdraw their funds anytime.
- P2P platforms offer greater chance of making an ethical investment.
Risks can be:
- A lender should be aware of the default probability of his/her counter party, given the fact that most borrowers who apply for P2P loans possess low credit ratings that do not allow them to obtain a conventional loan from a bank.
- Government protection isn’t included for lenders in case of the borrower’s default.
- Peer-to-peer lending may not be available to some borrowers or lenders.
Peer-to-peer lending is a unique platform for borrowers and lenders, providing both with alternative options to traditional banks and building societies. Though it has its strengths and weakness, P2P lending is gaining traction and seems certain to become more popular in several countries such as China, Japan, Italy, and the Netherlands.
By Tuan Nguyen