The services enabling cross-user (P2P) money transfer are among the most popular topics in the FinTech world of today due to their simplicity in comparison to the money transfers via traditional banks and their rather easier interfaces and installment processes through mobile applications. Matching lenders with borrowers through online services of P2P companies, this innovation enables individuals or businesses to run transaction activities with lower and flexible interest rates but with higher returns compared to the savings offered by traditional financial institutions. So, how can it be possible?
In this lending model in which the decision processes of loan originations are handled by private lenders and borrowers and websites like Prosper.com without the mediation of any financial institution, the loan process is dynamic. Even if the borrower is subjected to high-interest rates at times, it doesn’t make any negative impact at all since the P2P lending allows the borrower to have the advantage of having access to mixed rate offerings on an infrastructure in which the loans can be borrowed from multiple lenders at different rates. For lenders, it can be perceived as a highly profitable model where the investment risk is coupled to the credit rating of the funded loans. Additionally, the lenders can take a look at individual loan listings and see multiple parameters such as credit grade, income, DTI, occupation, location etc. Thus, the lenders can filter out unqualified borrowers according to their own strategies. Furthermore, for the platforms who might choose to act as intermediaries P2P is running on, there is an advantage of raising fees for successfully realized transactions. Therefore, P2P is considered an innovative model paving the way for low-risk loans with higher returns and lower costs for diverse actors in digital markets.
P2P lending isn’t attractive in the context of just savings accounts with lower risk and costs, and in addition, there are so many conveniences provided by this model such as detailed credit evaluation of borrowers and the lists of diverse borrower profiles only if the credit criteria is met. The measure of borrower’s credibility in P2P lending is related to both the borrower’s loan history including also the previous repayment failures (if any) and their education and employment details, social status e.g. as opposed to the methods of traditional banks to evaluate the eligibility of borrowers by relying upon just their monthly salaries. Therefore, banks tend to lend to people with salary accounts, preferably working with grade-A companies which in turn can make getting loans of self-employed people at affordable rates much more difficult. It’s obvious that in parallel to the expansion of opportunities offered by the P2P system, most of the people are now able to gain access to credits offered by not traditional banks because of their “dodgy” credit scores but other actors who are called the “peers”.
Another function of P2P lending is seen when a person becomes the investor in the platform. That person can play the role of the lender which enables the investor to charge interest. These earnings can be withdrawn from the platform and become the investor’s regular revenue. Therefore, loans do attract monthly returns. This is unlike many other investments in which the money is invested for as long as it is left there and not withdrawn.
As an alternative financial service in the age of digitalization, P2P lending model offers different types of loans for the borrowers. Many of them, also known as crowdlending, are unsecured personal loans. Another form of this model is the secured loans which are practiced on luxury assets such as jewelry, buildings, aircraft e.g and other business assets as collateral in the traditional bank systems. For banks, there are basically two types of loans: secured and unsecured. An unsecured loan is usually for smaller quantities. You can borrow a fixed amount and usually pay back for a consensus of up to five years. The system works in such a way that after signing the credit agreement, the interest is usually fixed in the related currency.
There may be other some concerns about the risks of P2P loans compared to the bank loans due to the lack of face-to-face interactions during the lending process. However, it should kept in mind that all investments are always under a risk. With the help of decentralized portfolio of loans in P2P system, it’s less likely for the people taking place in this kind of lending model to face with a higher risk compared to the equity or commodity market investments or real estate risks.