The emerging model of lending through platforms where lenders and borrowers find each other is known as peer-to-peer (P2P) lending defined Bahaa Abdul Hussein. Its greatest strength is that it promotes inclusivity by providing access to credit for many who cannot get it from traditional financial institutions. But it has both advantages and disadvantages.
Pros of P2P Lending
Access to Credit
P2P lending makes it easier for both individuals and small to mid-sized businesses to get loans. It also provides loans for those who will not get it from banks and other traditional financiers.
Diversification
Investors can hedge their risks by lending to different borrowers with varying degrees of risk. This diversification helps reduce the impact of potential losses from few high risk loans.
Higher Returns
By finding suitable borrowers P2P lending allows investors to maximize the rate of interest on the loans they offer. This increases their returns.
Lower Interest Rates for Borrowers
P2P lending allows borrowers to easily find lenders who will offer the lowest interests, reducing their overall costs.
Fast and Convenient
Because the entire process is online, P2P lending is faster and more user-friendly than traditional loans. So loans get approved and disbursed faster.
Flexibility in Loan Amounts
Small loans are not cost-effective in the traditional banking system. P2P lending is flexible enough to allow borrowers to get very small loans if they need it.
Cons of P2P Lending
Lack of Regulation
Since P2P lending is relatively new, the surrounding regulations are not up-to-date globally. This increases the risk to investors in some parts of the world.
Lack of Deposit Insurance
Banks offer deposit insurance which protects investors in case the bank becomes insolvent. But P2P lending platforms are not yet under any such obligation.
Unsecured Loans
P2P loans are not secured against collateral. This means there is no way to recover the investment in case of a default.
Incomplete Borrower Information
P2P lending platforms use a variety of data sources to assign a credit score for the borrower. But this data may not be exhaustive. So there can be borrowers with incomplete risk assessment if the platform cannot access all the necessary financial data.
Marketplace Risk
A stable P2P lending platform has a balanced number of borrowers and investors. If the number of investors dips below the number of borrowers by too much the platform may be unsustainable.
Conclusion
P2P lending has high potential for both borrowers and lenders as it caters to their specific needs. But it comes with inherent risks as it is new and regulations need time to catch up. With more research and suitable regulations P2P lending will see sustained growth in the future. Thank you for your interest in Bahaa Abdul Hussein blogs, For more information, please visit www.bahaaabdulhussein.com
