Traditional financing has many shortcomings stated Bahaa Abdul Hussein. Alternate financing has been leveraging these drawbacks to grow rapidly in recent years. A growing model is P2P lending which allows borrowers to build credit scores based on more data than their traditional finance data. This allows them to be eligible for loans from creditors unlike in traditional systems.
Types of P2P lending
There are many different niches in P2P lending that cater to different customer needs.
Consumer P2P Lending
Individual investors provide funds to individual borrowers through the P2P lending platform for a wide range of personal use. The lender earns interests on these investments.
Business P2P Lending
Individual or institutional lenders provide funds for small and medium-sized enterprises (SMEs) for business operations or expansion through the P2P lending platform.
Real Estate P2P Lending
Individuals or property developers receive funds from a pool of investors through the P2P lending platform. In this case the purpose is to exclusively finance real estate projects or property purchases. Investors may earn returns through interest or a share of the profits generated by the real estate project.
Invoice Financing
Investors advance funds against outstanding invoices to businesses helping them access working capital in case of delayed payments. Once the customer pays the invoice, the investor is repaid with interest.
Student P2P Lending
Students receive funds from investors for education, including fees, educational material costs and living expenses. At the end of the course and a grace period the students pay back the loan with interest.
Differences in the Funding Process
The process of P2P lending can also have different models. Some P2P lending allows lenders to bid for the lowest rate of interest. By competing for the loan, the lender has to provide the best possible interest rates for the verified borrower. This can lead to predatory practices where lenders with higher capital can outbid other lenders. To avoid this the alternative is a fixed-rate auction. In this case the interest rate is non-negotiable. If the lender chooses to fund a project they can do so without competing with other potential lenders. Besides this there can also be a marketplace lending model. In this case the P2P platform or associated financial entities fund the borrower directly. They sell the active loan potential lenders at a profit.
Conclusion
P2P lending is highly versatile. It has the potential to cater to various borrower needs. It also has various working alternatives in terms of actual financing of loans. So it can serve more and more new financial niches and help bring access to credit for new customers. Thank you for your interest in Bahaa Abdul Hussein blogs. For more interest, please reach out to www.bahaaabdulhussein.com
