24th April 2024
Reading Time: 3 minutes and 8 seconds
What is P2P Lending?
P2P lending enables individuals and businesses to lend and borrow money directly from each other without involving a bank. This approach allows lenders to earn a higher interest rate, while borrowers can enjoy lower interest rates compared to bank loans, as P2P platforms have fewer overhead costs than banks. However, this does not entirely eliminate the middleman. P2P platforms still perform various tasks, such as verifying borrowers, collecting repayments, and managing transactions, for which they charge a fee.
P2P lending is generally more financially beneficial for both lenders and borrowers, but it also comes with higher risks for lenders than a simple bank account. There are many such platforms available, and lenders can sign up with a chosen platform and deposit money through a debit card or direct transfer. Lenders can set a fixed interest rate and choose the loan term, usually ranging from one to five years. At the end of the term, once the loan has been fully repaid with interest, lenders can withdraw their money or reinvest it to generate further profits.
Why does it exist?
The collapse of the financial industry in 2008 led to the growth of alternative financial intermediation channels. Mainstream banks were unable to provide credit facilities to small businesses and start-ups, leading to the rise of FinTech. Peer-to-peer (P2P) securitisation emerged as a result, and this raised regulatory and policy questions, leading to an evaluation of UK FCA initiatives for a new regulatory framework.
Why choose peer-to-peer lending?
P2P lending connects private investors with borrowers. P2P offers higher interest rates to lenders and lower rates to borrowers. The interest rate depends on the strength of the borrower's business profile. Entrepreneurs apply for loans directly with the P2P provider but borrow from investors. Investors can either choose which business to lend to or have their money automatically divided between borrowers.
How much should I invest in peer-to-peer lending?
Peer-to-peer lending platforms offer a convenient way to invest your money, with a minimum investment of just £100. However, for first-time P2P lenders, the Financial Conduct Authority (FCA) in the UK has imposed a limit to protect them against default. Therefore, you may want to consult an Independent Financial Adviser to determine the best investment amount suitable for your financial goals and risk appetite.
How does Crowd2Fund mitigate risks on behalf of its investors?
Crowd2Fund conducts a preliminary credit check on the borrower, and if the check is successful, the loan is classified into different risk markets, ranging from A* to E. These markets represent various factors, such as the likelihood of debts being repaid on time, the borrower's credit history, and their debt-to-income ratio. Furthermore, risks from the perspective of investors are typically categorized under simple classes of risks.
Discover more about our Due Diligence process here. Read more about our collections department here.
Summary
P2P lending is an innovative approach that disrupts traditional banking by providing an alternative channel for credit and investment. However, it is important to understand the risks and choose reputable lending platforms. P2P lending offers enticing financial solutions beyond conventional banking. By conducting due diligence, investors can mitigate risks and maximize returns. Borrowers benefit from lower interest rates and flexible terms to achieve financial goals. Overall, P2P lending has revolutionized the lending landscape and promises to offer more opportunities.
To gain further insight into our metrics email credit@crowd2fund.com
To apply for funding email sales@crowd2fund.com
Sources:
https://tink.com/blog/open-banking/benefits-lending-solutions/
https://link.springer.com/article/10.1057/s41261-019-00118-9
