Peer to Peer Lending – Should You Try It?
Peer to Peer lending is the practice of lending money to unfamiliar, unconnected individuals or “peers”. It eliminates the need to use traditional lending sources like a bank or other financial institution.
The purpose of peer to peer lending is to generate revenue and profit for the lenders, which is done by collecting the fees and charges accumulated on the loan by borrowers.
Online peer-to-peer lending companies complete the transactions using various different credit checking tools and lending platforms, making the process efficient and easy for both lender and borrower.
The Basics of Peer-to-Peer Lending
The majority of Peer-to-Peer (P2P) loans are unsecured personal loans, made to individuals, not companies. Peer to peer lending covers many financial needs that include student loans, commercial and real estate loans, payday advances, and many other types of borrowing needs.
P2P loans are often able to offer very competitive interest rates compared to traditional lending avenues, due to very low overhead expenditures involved in a P2P lending organisation. Interest rates are determined by the lenders themselves and are factored based on a complete analysis of the borrower's credit standing and ability to repay the loan.
Lenders can decide for themselves which borrowers they wish to do business with and can mitigate the risk of financial loss by investing in a diverse portfolio of borrowers.
Loans are facilitated through online companies often referred to as intermediaries.
Peer-to-Peer Lending Intermediaries
Intermediaries connect borrowers with lenders in the P2P industry and service other needs. These needs include providing an online investment platform to attract lenders, developing and maintaining credit models for pricing and loan approvals, to verifying the borrower's personal details including identification, bank account, and employment records. They also work by filtering out unqualified borrowers by performing credit checks, processing loan payments and ensuring funds reach the lender, as well as all marketing needs that are attributed to finding new borrowers and lenders. Intermediaries also handle all attempts to collect on defaulted payments, and take care of all legal and compliance reporting.
Regulations for Peer-to-Peer Lending
The peer to peer lending model does not fit into the three traditional types of financial institutions, which are insurers, investors and deposit takers. Therefore, it is often referred to as an alternative financial service and is not necessary governed by the same laws and regulations as the others. P2P lenders are, however, governed by the standards put into place by the Financial Conduct Authority since April of 2014, so there are some guidelines in place as to fair conduct. However, they are not eligible to be protected by the FSCS, or otherwise known Financial Services Compensation Scheme.
Peer-to-Peer loans are not protected by any government guarantee the way traditional loans are, and are also at risk of the company handling the loan goes into bankruptcy.
The History of Peer-to-Peer Lending
P2P lending first surfaced in throughout the UK in 2005 and is responsible for financing more than 600 million GBP in loans ever since. Industry leaders like Zopa have facilitated more than 500,000 borrowers totalling funds received at over £50m. The business model for this industry has needed some serious periods of adjustment, especially after industry upsets like the company Quakie’s near 100% default rate. However, there are success stories, so checking out this method of raising finance may be worth looking at.