Currently, there has been a rapid development in the world of finance and technology. In this regard, one of the most important trends is considered to be peer-to-peer or marketplace lending.

A peer-to-peer lending software is involved in this particular process. Also, in this case, a third-party platform is inclined towards matching borrowers and lenders. As a result, this helps to create completely new opportunities in traditional financial institutions or banks.

In this regard, the most popular P2P lending services include privately held Prosper as well as the publicly traded lending club. The online marketplaces of these particular platforms usually act as intermediaries for loans that are given to businesses and consumers.

They tend to offer an opportunity to the investors so that they can easily finance the loans. But, in this case, the loan amount has to be in the range of $2,000 to $35,000.

Since the year 2010, specifically, the dollar amount of the marketplace loans has become more than doubled every year. In 2014, it reached about $12 billion whereas it becomes more than $16 billion for the first 6 months particularly in the year 2015.

So, in this section, you will get to know a detailed explanation regarding the challenges and opportunities of peer-to-peer landing.

Peer To Peer Lending

The rapid development in the field of information technology is continuously changing many of the traditional business models. In this regard, progress in the IT sector is specifically bringing a lot of changes to the market.

This involves a reduction of the search costs. As a result, it becomes very easy for the sellers and buyers so that they can discover each other directly specifically on web-based platforms. So, in this case, there is no such need for any intermediaries, brokers, or mediators.

This development is again found to have a great impact on almost all the trading business models such as the trading of capital. To achieve more yield, specifically the institutional and retail investors are focusing more on crowdfunding.

But, this crowdfunding can be risky and so, the investors should have a proper idea about the risks which are involved in this particular process.

Challenges And Opportunities

Specifically, the development of more efficient platform technologies has contributed to the rapid growth of peer-to-peer lending platforms. These things have helped in the expansion of virtual communities, the potential for more competitive returns, and make more secure transactions.

So, all the above-mentioned factors when combined in the right way helps to make P2P lending a robust force, particularly in the financial service sector.

Again, a few similarities existed between traditional lending and marketplace lending. Similar to the banks, the P2P platforms also wish to generate profit. But, apart from that, other aspects are considered to be completely different between both of these platforms.

So, below are mentioned some of the unique features of these P2P platforms such as:

·         In this case, the loans are unsecured.

·         It is possible to convert P2P loans into securities and sold them to other lenders.

·         The transactions in P2P loans take place online, but not in any office.

·         Borrowers and lenders do not need to have any prior relationship or a common bond.

·         The P2P company does not serve as a lending institution. Instead of that, they mainly act as an intermediary.

·         In the case of P2P, the lenders are free to choose which borrowers to particularly invest in.

Opportunities Of Peer-To-Peer Lending

Peer-to-peer lending contributes to offer a lot of opportunities or advantages to both the lenders and borrowers such as:

·         Lower Rate of Interest

One can easily opt for peer-to-peer or P2P lending as the P2P loans come with a lower rate of interest. This is possible due to the greater competition between the lenders as well as lower origination fees.

·         More Accessible Funding Source

When compared to conventional loans, peer-to-peer lending is considered to be a more accessible funding source specifically for some borrowers. This can be because of the low credit score of the borrowers or some other reasons.

·         Higher Returns to the Investors

Talking about peer-to-peer lending contributes to providing higher returns to the investors relative to any other sort of investment.

·         Fast Approval

One of the best advantages of peer-to-peer or P2P lendings for which a lot of the people are currently opting for these include fast loan approval. Due to the presence of a digitally-enabled application process, the P2P loans are approved in very little time.

On the other hand, loans from banks require more documentation, effort, and time and this is considered to be the main reason, why P2P loans are more convenient.

·         In-Depth Understanding of The Lending Needs

Specifically, the P2P lending platforms are known for their more in-depth understanding of the local community along with their lending needs.

·         Operate In a Much Different Way

Individuals and organizations are inclined towards taking the path of least resistance until any outside force allows them to rethink the specific way they perform things and also ask new questions on how to do things in a much better way.

One of the great examples of this is loans. In this regard, the community banks always focus to operate their business under a set of rules. On the other hand, P2P lenders operate their business in a completely different way.

In this regard, the P2P lenders generally make use of peer-to-peer lending software to rethink the traditional processes.

Also, they are involved in finding out completely new processes with the help of which, they can shorten and simplify the process in such a way so that it appears appealing to the consumers.

Not only that, but this particular process is also proved to be very much helpful for the business owners.

So, these are some of the most important opportunities or advantages of this P2P lending. As a result, the concept of P2P lending worked well. The whole thing initially started with consumer loans.

But, currently, this is considered to be a kind of business loan. This is because it is the same website in which both the borrowers and the investors are meeting whenever someone is looking to borrow or invest money.

As a result, commercial banks should pay close attention to the aspects where they are left behind of the P2P lending platforms. But, on the other hand, several other advantages of commercial banks are not present in the case of a P2P lending platform.

So, the below-mentioned section will let you know about the specific challenges which are associated with P2P lending.

Challenges Of Peer-To-Peer Lending

A few challenges or disadvantages of peer-to-peer lending include:

·         Legislation

Some of the jurisdictions do not generally allow P2P or peer-to-peer lending. This is specifically because some of the countries only allow those companies who are involved in providing the services which are compliant with the investment regulations.

Due to this particular reason, peer-to-peer lending may not be available to some lenders or borrowers.

·         Lack Of Protection From The Government Or Unavailability Of Insurance

In the case of P2P lending, the government does not provide any insurance or other forms of protection to the lenders specifically in case of the borrower’s default.

·         Credit Risk

P2P loans usually come with high credit risks. A lot of the borrowers who consider applying for the peer to peer or P2P loans generally possess low credit ratings.

So, there are credit ratings that do not allow them to get a conventional loan from commercial banks. This is considered to be the main reason, why a lender should be aware of the default probability of their counterparty.

·         No Government Regulation

In this case, one of the major issues for the investors is that the marketplace lending platform along with their investors is not regulated by the government. Not only that, but this particular platform is also not insured by the government agencies.

So, this is considered to be one of the major considerations which the borrowers, lenders, and investors should focus on keeping in their mind before they opt for P2P lending platforms.

Other than that, there are again some other restrictions that are associated with the P2P lending platforms. For the P2P loans, there is a lack of liquid secondary trading markets. As a result of it, they remain largely hold-to-maturity investments.

Moreover, the securitization of P2P or marketplace lending is still not developed fully. But, this is expected to play a very important in the growth of the overall sector in the future times.

As a result, this specific platform contributes to providing needed liquidity and transparency to the investors who are looking forward to getting greater returns on their investment.

·         Potential Risks to the Investors

P2P or marketplace lending presents several risks to the investors. There are chances that the particular P2P platform will close and you would be unable to recover the money which you have invested.

Other than that, there are risks that the loan originator closes, and thereby you cannot recover your investments. Apart from that, another risk is that the borrower makes late interests or principal repayments or does not pay back your loan amount.

So, the investors should be very careful while investing their money in these platforms. They should choose only reliable marketplace lending platforms for avoiding such risks.

Reasons Why The Borrowers Are Using P2P Lending Platforms Instead Of Banks

Instead of having several disadvantages, there are several reasons, why the borrowers are involved in using these P2P lending platforms instead of the banks for getting a loan.

Although, the investors find it very difficult to understand the reasons which contribute to make P2P lending a safe option to choose. So, this explanation will effectively clear all your doubts.

Some of the borrowers specifically have good reasons to choose the P2P lending platforms such as:

·         They can get a loan at an interest rate that is much lower when compared to a bank. This is specifically because only fewer overhead costs are involved in this type of lending when compared to a bank. Although, this particular thing cannot be applied always.

·         The borrowers can easily opt for a faster loan when compared to any other commercial bank. Some of the P2P lending platforms even focus on providing loans to the borrowers in less than 24 hours.

·         Other than that, some of the borrowers choose this P2P lending platform because this helps them to advertise their business. Along with that, they can ask for a loan from a particular platform that receives a lot of visitors daily.

On the other hand, some other borrowers have completely different reasons to get loans from the P2P platforms. Some of the reasons for this include:

·         The borrower cannot borrow any more from any commercial institutions as he or she is already over debt.

·         The bank did not accept to give them a loan due to their low credit score or investment risk.

Final Words

So, the above-discussed ones are considered to be some of the major challenges and opportunities associated with the peer-to-peer lending platforms that anyone should know about before opting for P2P loans.

Before you start investing in these specific platforms, it is very important to learn about P2P or peer-to-peer lending well. Another important thing is to choose the best P2P lending platform to avoid any further issues.

Therefore, a proper assessment of the P2P lending platform is very important to find the right one for your needs. Not only that, but you should also access the particular projects which you are investing in.

Another important thing is to diversify your investments. In this regard, you should mainly focus on diversifying your investments in many projects, platforms as well as countries.

All of these approaches will help to effectively mitigate the risks which are associated with the P2P platforms.