Peer to Peer lending is a special type of lending in which individuals go through the lending process by using online platforms or software without using banks. P2P lending has revolutionized the way lending has been done in the past.
The P2P lending market size is valued at USD 82,300 million in 2021 and is expected to reach USD 804,200 million by 2030, growing at a compound annual growth rate of 29.1% which means it is growing enormously.
In this piece of content, we will discuss the working of P2P lending, its benefits, key features, and the potential risk an individual can face while doing P2P lending. Keep reading this post and by the end of this article, you will find all the basic information about P2P lending.
How Peer-to-Peer (P2P) Lending Works
Loan Application and Registration:
In P2P lending the first step is loan application and registration. This is a very short and user-friendly process that can be completed in a few minutes. In this process, the borrower registers himself on the online P2P platforms and submits their loan application.
Credit Assessment and Risk Evaluation:
This is the second step in which P2P platforms conduct credit assessments to evaluate the creditworthiness of borrowers. Creditworthiness of a borrower is judged based on a couple of factors like credit score and financial history. It is done by the P2P platform to check out the risk profile of borrowers.
Borrower Listing and Loan Request:
When a borrower loan request is approved it gets listed on the platform with all other necessary information like loan amount, purpose, and interest rate. Investors then look at these listings to check out which borrowers should be funded with the loan.
Account Registration and Funding:
Account Registration and Funding: Investors create accounts on the P2P lending platform and fund them with the desired amount. Some platforms may have minimum investment requirements.
Loan Selection and Diversification:
Investors can browse through various loan listings, each with its interest rate and risk grade. To mitigate risk, investors often diversify their investments across multiple loans.
Return on Investment and Interest Earnings:
As borrowers repay their loans, investors receive regular payments that include both principal and interest. These returns constitute the earnings for the investors.
Platform Facilitation and Risk Mitigation
Matching Borrowers and Investors:
The P2P platform facilitates matchmaking between borrowers and investors, connecting borrowers’ loan requests with investors interested in funding them.
Payment Processing and Collections:
P2P platforms handle payment processing, ensuring that investors receive their returns on time and borrowers’ payments are collected efficiently.
Default and Delinquency Handling:
In cases of borrower defaults or delinquencies, the P2P platform typically implements collection procedures and may assist in resolving the matter.
Key Features and Characteristics of Peer-to-Peer Lending Platforms
Transparency and Accessibility:
Online P2P platforms are very transparent and provide true information about borrower interest rates and loan terms to help investors to make informed decisions.
Loan Types and Interest Rates:
P2P lending platforms accommodate various loan types, from personal loans and small business loans to real estate financing. Interest rates may vary depending on the creditworthiness of borrowers on P2P platforms.
Diversification and Risk Management:
Investors can decrease the risk of potential defaults by diversifying their portfolios to different loan requests. It will decrease their potential loss scenarios.
Secondary Market Options:
Some platforms offer secondary markets where investors can buy and sell existing loans, providing liquidity and flexibility.
Advantages of Peer-to-Peer Lending
Benefits for Borrowers:
- Access to funds with simplified application processes.
- Competitive interest rates compared to traditional lenders.
- Fast loan approvals and disbursements.
Benefits for Investors:
- Opportunities for attractive returns on investments.
- Diversification options for risk management.
- Direct impact on borrowers’ lives and projects.
Potential Risks and Challenges of Peer-to-Peer Lending
We know there are a lot of advantages to both investors as well as borrowers of using P2P lending but at the same time, it also has some drawbacks which are given below.
Default risk is a big challenge for investors as in the case of borrowers default, investors can face potential losses.
Regulatory and Legal Considerations:
P2P lending platforms must adhere to evolving regulatory frameworks to protect both borrowers and investors.
Future Trends and Innovations in Peer-to-Peer Lending
Continued technological advancements may improve platform efficiency and user experience.
Global Expansion and Market Penetration:
P2P lending platforms may expand their reach globally, opening up new investment opportunities.
As we have discussed at the start of this article, peer to peer lending has changed the way of conventional lending and made it easier for individuals to borrow money without going to banks as we see in the past.
Now, both Investors as well as borrowers can do their work by just sitting at home without any inconvenience. There are a lot of benefits to using P2P lending but at the same time, we have to face some difficulties in this type of lending.
*THIS IS NOT FINANCIAL ADVICE*
Author: Stacy Dubovik
Financial Technology and Blockchain Researcher
Stacy joined ScienceSoft in 2020, bringing in her expertise in large-scale digital transformation projects and practical knowledge of the finance domain. Stacy frames ScienceSoft’s service offerings and technology guides in corporate finance, BFSI, DeFi, and blockchain. She works side by side with business analysts, software architects, and developers to help create innovative solutions that bring unique client value. Stacy continuously monitors customer expectations and technology trends in the BFSI market and explores the newly-emerging fintech and blockchain products.