Personal loans are a big part of many peoples’ lives these days. They can be particularly useful for salaried individuals and help them cover large expenses, such as consolidating debts or purchasing a car. They also make a good option to cover emergency expenses.
Acquiring a personal loan, however, is not always easy. Traditional lenders have numerous requirements that make qualifying for a loan difficult for many people in need. This is what led to the growth of peer-to-peer lending.
What Is Peer-to-Peer Lending?
Peer-to-peer or P2P lending is an alternative to traditional bank loans. It’s an easier way for people and businesses in need of money to acquire loans from other individuals. Peer-to-peer loans can be obtained with not-so-good credit history and also often come at better rates than traditional loans. P2P lending is also an opportunity for individuals to make some extra money by giving out loans.
How Does P2P Lending Works?
The concept of P2P lending has been around for quite a long time, but it has become more structured with the growth of technology. Today, there are specialized P2P digital platforms to connect investors with those looking to get loans. These are sometimes called P2P marketplaces and fall into the category of fintech.
When it all started, the peer-to-peer lending industry was dominated by individual investors. However, with the popularity of the concept and the growth of the industry, many financial organizations have also entered the field.
Since individual lending was risky, many investors have now partnered with these financial organizations. The advanced AI tools that these large financing institutions have access to help individual investors better evaluate the creditworthiness of the borrower and secure their investment.
While there are still some individual lenders, most fintech lenders now work with banks. This is why many experts argue that the original concept of the lending system is lost with industry growth. It isn’t truly peer-to-peer lending anymore.
Fintech Lending Is Growing
With many major players entering the industry with massive capital, the digital lending market is growing. Not only has the profitability increased, but there has also been a significant expansion of the market with new financial product lines, features, and services.
Factors That Contributed to the Massive Growth Of The Fintech Lending Industry
The United States Government Accountability Office has identified five key factors behind the substantial growth of the digital lending industry. These include:
Fast processes; improved response times, and quick approvals.
They make loans accessible to previously unserved market segments; people with not-so-good credit histories and startups looking for smaller loans.
Lower interest rates in many cases.
The massive increase in the amount of funding available is due to the involvement of investment organizations.
The lack of regulations makes loan processing and acquiring easier (may change in the near future as it also poses high risks).
Is Peer-to-Peer Lending A Good Option?
Even though the original concept of P2P lending is somewhat lost with financial institutions’ involvement, it is still a good option for both investors and borrowers. To borrowers, it allows for securing loans without an excellent credit history.
They may also be able to secure loans at better interest rates than traditional lenders. Lastly, peer-to-peer loans are processed much quicker, making them a good option for emergency expenses. With return rates ranging from over 5% to more than 14% (for high-risk borrowers), peer-to-peer lending is also a good opportunity for investors.