Recovering economy and growing consumer confidence positively affect growth in the personal loan business. Both incumbents and disruptive startups are trying to take advantage of the expanding size of the lending market.
The peer to peer loans sector is still relatively small in comparison to traditional brick and mortar lenders. Its growth has been fueled by a growing penetration of smartphones and internet-connected tablets and overall expansion in the mobile devices sector.
Going through a peer to peer lending route might be a good choice for people who couldn’t get a loan from their bank. In a peer to peer loan company, people with spare cash can offer it to a loan seeker and make a profit by the end of the agreement. Peer to peer lending apps are simple to use, both for borrower and lender. They are also secure and well developed, as some startups get investment and partnership agreements with hedge funds and banks.
What Are Peer To Peer Loans And How Can Borrowers Benefit From Them?
Some people don’t trust traditional loans providers. They can make the most of the recent developments in the financial technology sector and simply take a peer to peer loan.
Borrowers can even skip financial advisers or brokers and instead use rates comparison sites to find out which platform lets them take a personal loan and on what terms. Nowadays, consumers of financial services can satisfy their short loan needs from the comfort of their homes.
One of the advantages of a peer to peer loan company is the speed of procedures. A P2P loan gets approved (but also rejected) quicker than in a traditional lending institution. The downside is a sometimes higher interest rate. The prospective borrower deals directly with the alternative lender without any intermediary involved. The interest rates are clearly stated, together with other costs, making the whole process transparent.
Well designed applications and clearly laid out lending criteria improve the overall customer experience for both sides (borrowers and lenders).
Fintech Startups In The Lending Sector
The fintech startup is usually efficient, makes decisions fast and keeps costs down. Those traits benefit borrowers as they get good deals quickly.
Some peer to peer lending platforms might, however, have loose credit criteria and give loans to so-called subprime borrowers. It increases the size of a loan book but might negatively impact the default rate.
Is Peer To Peer Loan Business Good For Lenders?
Low-interest rates and low returns on saving accounts makes people look for more attractive investments. Lending spare money to individuals on peer to peer lending sites is one of them. Lenders cooperating with these non-bank institutions can provide the cash to those who need it. Savers have a lot to gain here. They can also widen their investments by lending to diverse groups of borrowers, based on many variables such as profession, age and credit history (on the platform).
The growing economy and increased spending on innovation are likely to make the peer to peer lending stronger and more popular with savers.
Why Are Peer To Peer Lending Companies Better Than Banks?
The march of P2P lenders over the financial services landscape continues. Their fastest growth takes place in countries such as UK and USA. Europe, too, is a hotbed for those wearing ‘disruptor’s hats’. Alternative lenders play a role of facilitators between those wanting to raise funds and those willing to invest in it.
They don’t leverage any funds, which doesn’t increase their business risk unnecessarily. Most of the loans are funded by savers. However, when the demand for loans outstrips the supply of cash, peer to peer platforms get extra support from an incumbent just like P2P currency exchanges get a helping hand from banks when they need to satisfy the extra demand for a certain currency.
It is easier to qualify for a loan with a peer to peer lender than it is with a bank. Savers investing on a P2P platform get a better return on their money than on a traditional saving account. The default rate is relatively small. Borrowers benefit, too – cost of a loan is competitive.
An ability to repay is calculated using regular credit scoring methods. Some novelty methods are also used such as data from social media, for instance – LinkedIn.
High Returns But High Risk, Too?
The barrier of entry to the sector is low. That fuels the competition in the peer to peer lending space even more. But small and medium-sized firms are still hesitant to use alternative methods of financing (including crowdfunding).
P2P lenders will take a real test of sustainability when the economy slows down again or when the interest rates will go up. Their business model has not yet been tested out in the longer run. Going through different economic cycles, and surviving, will prove if the alternative lenders are a solid part of financial services puzzle or just a fade.
The legal situation of peer to peer lenders is still uncertain. Some countries might introduce regulatory measures that can change the outlook. Some administration units in a country (for example some states in the USA) can severely restrict their activities.
Investing in a P2P loan can be risky as a borrower can fail to repay it. Alternative lenders are sometimes considered as institutions of last resort. The consumer might not have the full knowledge of the product or not have the time to acquire it. Reckless decisions by some borrowers might affect the overall default rate of peer to peer lending sites.
Growing competition between P2P lenders and low margins in this business might force some of them to close or to partner with some other alternative or traditional lenders.
Peer to peer loan companies might be inclined sometimes to lower the criteria in order to increase the customer base. That might attract high-risk borrowers. This is the same group that had the interest in so-called subprime mortgages, the explosion of which started the global recession.
2016 – The Year Of The Test For Peer To Peer Loan Companies
Lack of high overhead costs and expensive legacy systems can only help P2P lending startups in taking the market share from the established players. Droves of innovative companies are now disrupting the financial services industry all over the world.
P2P lending is not dead yet. And banks don’t stand still, either. They innovate, too, and they have the money to do that. The battle for the hearts (and the wallets) of consumers is on.