08/05/2020
Peer-to-Peer (P2P) Lending
What Is Peer-to-Peer (P2P) Lending?
Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman. Websites that facilitate P2P lending have greatly increased its adoption as an alternative method of financing.
P2P lending is also known as “social lending” or “crowd lending.” It has only existed since 2005, but the crowd of competitors already includes Prosper, Lending Club, Peerform, Upstart, and StreetShares.
KEY TAKEAWAYS
-P2P lending websites connect borrowers directly to investors. The site sets the rates and terms and enables the transactions.
-P2P lenders are individual investors who want to get a better return on their cash savings than a bank savings account or CD offers.
-P2P borrowers seek an alternative to traditional banks or a better rate than banks offer.
Understanding Peer-to-Peer Lending
P2P lending websites connect borrowers directly to investors. Each website sets the rates and the terms and enables the transaction. Most sites have a wide range of interest rates based on the creditworthiness of the applicant.
First, an investor opens an account with the site and deposits a sum of money to be dispersed in loans. The loan applicant posts a financial profile that is assigned a risk category that determines the interest rate the applicant will pay. The loan applicant can review offers and accept one. (Some applicants break up their requests into chunks and accept multiple offers.) The money transfer and the monthly payments are handled through the platform. The process can be entirely automated, or lenders and borrowers can choose to haggle.
Some sites specialize in particular types of borrowers. StreetShares, for example, is designed for small businesses. And Lending Club has a “Patient Solutions” category that links doctors who offer financing programs with prospective patients.
How P2P lending evolved
Early on, the P2P lending system was seen as offering credit access to people who would be spurned by conventional institutions or a way to consolidate student loan debt at a more favorable interest rate. In recent years, however, P2P lending sites have expanded their reach. Most now target consumers who want to pay off credit card debt at a lower interest rate. Home improvement loans and auto financing are also now available at P2P lending sites.
The rates for applicants with good credit are often lower than comparable bank rates, while rates for applicants with sketchy credit records may go much higher. LendingTree.com, for example, offered personal loan rates from 10.19% to 24.98% as of December 2019.1 Peerform posted loan rates at a range of 5.99% to 29.99% as of February 2020.2 The average credit card interest rate was 17.30% as of Feb. 5, 2020, according to CreditCards.com.
For lenders, P2P lending is a way to generate interest income on their cash at a rate that exceeds those offered by conventional savings accounts or certificates of deposit (CDs).
At MelaCredit we are doing exactly the same to help more people to have credit/ financial access here in Ethiopia 🇪🇹
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