Remember the global financial meltdown of 2008? The collapse of the global financial system when the banks were not lending to anyone. People need to borrow and this opened up the door for people to seek alternatives. This birthed CrowdLending, the free market saw the need and an opportunity. This marked the beginning of peer to peer lending. There’s a change in how people borrow money and who they borrow from. Even after the recovery from the global financial meltdown, people still continued to see peer to peer funding as a better alternative.
Today, rather than go to banks or brokers, people go to other people. Peer to peer lending is simple, helping one another, rather than being subjected to the draconian conditions of traditional financial institutions. Even though peer to peer lending platforms were already in place before the global financial meltdown, the global financial meltdown amplified the need for crowdfunding. Many saw the requirements of lending from banks as being too difficult. However, peer to peer lending means you can easily access funding without having to wait for anyone to give you a YES or No answer based on your Credit score.
There’s this confusion between peer to peer lending and crowdfunding. Are they actually different? Yes, they are. The difference lies in the logic; crowdfunding deals with pooling resources together to buy a property. In this scenario, each of the funders own a share of the property. For example, if you have four friends, and all of you come together to buy a property. Each of you owns 25% of the total value of he property, that’s crowdfunding.
What’s Crowdlending (Peer To Peer Lending)?
Look at it from the perspective of a bank or other borrowers, they are the exclusive owners of the fund being borrowed.
When it’s Peer to Peer Lending, there’s no single owner of the fund. The lending is pooled together from numerous investors.
With P2P, you can borrow money without a bank being involved. You can either be a business or an individual to access P2P funds.
How Does Peer To Peer Lending Works?
So let’s assume you intend to either be a borrower or an investor, that’s the two categories of stakeholders in P2P lending. There’s no broker or a middleman who makes money off you while lending or borrowing.
Let’s break down the roles of the stakeholders in P2P;
You can also call them the investors, anyone can be the investor. So far you are able to provide the needed capital required by the borrower. There’s no single lender, it’s always a group of investors that makes up the lending category.
This category borrows from the lenders.
You don’t need to have a massive capital to fall into the investors category, as little as you have, you can meet the need of the borrowers.
Some compare Peer to Peer lending to mutual fund, they share some similarity but are different with the fundamentals. For instance; you are not buying stocks or any other financial instruments, you are pooling resources together in order to give to the borrowers.
Another difference is the benefits accruable; your gain is the interest to be paid on the fund by the borrower. Your gain isn’t hinged on the performance of the stock like mutual funds.
The Strengths of Peer To Peer Crowd Lending
This is just like saying; why are people interested in Peer to Peer Lending. Usually, people judge Peer to Peer lending on three metrics; safety, interest rate and liquidity.
On these three strengths is what peer to peer lending is built on. It scores highly on the three legs when compared to traditional financial institutions.
Why Are People Borrowing From P2P Platforms?
If you ask different people, they have their reasons. Just like the borrowers have their reason of choosing P2P over the traditional financial institutions. However, they are cogent and important reasons;
1. The Liberal Nature of The Requirements
Anyone who have been to a bank to request a loan will testify to how difficult their requirements are. It’s even easier in developed economies, accessing loans from bank in developing economies is like trying to break a rock with the rod of moses, it’ll take a miracle.
However, P2P is quite lenient. All it considers is the ability of the borrower to payback in a timely manner. These days, you can even access P2P funds right from your comfort zone. No need to step into the banking hall and wait for your credit rating to be reviewed and re-reviewed.
In reality, P2P platforms are less restrictive. The purpose of your loan isn’t a concern, what matters to the investor is your ability to pay back when you said you will.
2. Lower Interest Rates Compared To Traditional Financial Institutions
Banks are scared that P2P platforms will soon run them out of business. actually, they won’t as a little percentage will still prefer banks to P2P lenders. The smart ones will still choose P2P over banks a thousand times over and over again.
Sure, P2P lenders are also out to make gains but their gains are minimal when compared to banks. Imagine what you’ll pay to banks on credit cards or business loans, it’s comparatively higher than what is obtainable in P2P lending platforms.
What matters is the loan type, you’ll always get a good deal out of P2P lenders.
3. The Speed and The Ease of Application
From start to finish, peer to peer lending may take between 2 to 3 days. Compare that to the traditional banking system. You will find yourself dealing with bank loans for as long as 3 weeks, some may even take months depending on the amount involved.
There’s a level of ease that comes with P2P lending also. You may not have any face-to-face interaction in the application process. Everything can be sorted online.
From verification, signing and filling of necessary documents, all can be done from your comfort zone.
These are more are what makes P2P lending attractive to the borrowers. You may now ask, why should you invest into P2P?
Why You Should Invest Into Peer to Peer Lending
It’s not just the borrowers that have something to gain, you even stand to gain more as a Peer To Peer investor.
- P2P is Globally Embraced
The fame of Peer to Peer lending has grown beyond the UK where it first started. Today, it is being embraced all over the world especially in Third World Economies where accessing funding by individuals and businesses is hardwork.
From 2009 till now, Peer to Peer investments have taken roots and prominence. The fear of the early invested has dissipated with the successes recorded so far. The increase in use by borrowers have translated to huge returns for investors.
This has further fueled the acceptance of Peer To Peer lending by investors.
- Low and Shared Risk
Every investor looks forward to having the lowest risk factor possible for their investments. This is a strength of Peer to Peer lending looking from the investment angle.
Through Peer to Peer investment, you rarely lose money. Even if you eventually lose money, it’s a shared risk, a risk that is shared evenly just as the gains. It’s like investing small amounts in smaller businesses, not a lump sum into a single business. This means that you’ll get back your investments even if some of the smaller businesses doesn’t pay back.
You know who you are lending to, with a good research if they will pay back or not.
- Multiple Investment Options
As an investor, the growth and proliferation of peer to peer lending sites means there’s multiple of avenue to invest excess capital. It’s now becoming easier to enter into the peer to peer lending industry as an investor.
You can invest in as many peer to peer platforms as you so wish. Look through the peer to peer platforms to know which one meet you investment needs.
It’s becoming more efficient and famous, a pointer to the stability every investor seeks.
The Risk Involved in Crowdlending
As sweet as crowdlending appears, its an investment and carries along it’s own level of risk. A risk that every investor into crowdlending must be aware of and must do everything possible to mitigate.
Crowdlending is a financial asset and it can’t be risk free. The level of risk involved in crowdlending is at different level, depending on how you look at it. Let’s start from the very serious risks;
1. Platform Risk.
What happens to your investment when the crowdlending platform you invest into goes bankrupt?
You are going to lose your entire investment, there’s no two way about it. This is one high level of risk that keep many crowdlending investors wide awake at night.
This risk can only be remedied if you do your research thoroughly about the crowdlending platform. Seek to know their level of accreditation, the regulations guiding them and the government agencies responsible for enforcing these regulations.
Another remedy to this risk is to diversify as much as you can. Don’t invest all you have into a single crowdlending platform. Invest in but to all these crowdlending platforms you have identified.
2. Loan Originator Bankruptcy
If the crowdlending platform doesn’t go bankrupt, what about the third party agencies involved?
This risk is similar to the platform bankruptcy risk. A loan originator is a third party agency facilitating loan for the platform. What if these loan originator defaults on a loan?
It could even be worse if the platform relies on a single loan originator. Seek for a crowdlending platform that spreads it loan across multiple loan originators.
The best is if your platform is giving loans vetted by themselves which still leads us to risk number one; platform risk.
3. Loan Defaults
What if the borrower is unable to pay back the loan?
Just like you borrowing your friend or sibling some money, there’s no assurance they might pay back. This also happens with crowdlending, the borrower may default on the loan.
When there’s loan defaulting, you may be lucky to get back part of the loan, or nothing at all including the interest accruable from such loan.
This isn’t a platform issue, it can happen to anyone. Regardless of how stringent the vetting process could have been.
Usually, the crowdlending platform often initiate legal redress in order to get back the loan. More often, the defaulter is unable to pay the loan.
The best remedy is to choose a crowdlending platform that has a buyback guarantee on borrowers’ defaults.
One cent; invest ONLY in crowdlending platforms that offer a buyback guarantee on borrowers’ defaults and other issues. So also, avoid high interest loan platforms. Such crowdlending platforms records high number of defaults.
4. Money Drag
The least of the crowdlending risks but it’s still a risk.
Upon repayment of a loan by the borrower, you may find yourself unable to re-invest the loan and the interest.
The issue is this; with auto-invest, you may find your capital tied down unable to meet criteria for re-investment. This scenario may drag on for weeks or even months.
Regular monitoring of your loan will help identify likely money drags even before they occur. Through this, you are able to take action before your investment becomes dormant and turns into a money drag.
How Does Loan Buy Back Guarantee Work in Crowdlending?
Before investing into any crowdlending platform, it is important to do some research into their buy back guarantee conditions.
A buy back guarantee means that if the borrower defaults on the re-payment, the loan originator will buy back the defaults after a period specified.
Usually, a period is attached to every buy back guarantee, after which the loan originator has the obligation of buying back the loan.
Globally, crowdlending is becoming more efficient and famous. For those in need of loan, it’s a cheap and quick means of accessing the loans and for the borrowers, a fast one of making profits.