According to a recent
report conducted by Globe Newswire, the market of Peer to Peer lending
was valued at $82,300 million in 2021, which is expected to reach $804,200
million by 2030, growing at a CAGR of 29.1%.
Peer-to-Peer lending platforms have emerged as a popular alternative to
traditional lending institutions, which can have rigid
lending criteria and long approval processes. Borrowers can access quick and
easy financing options, while lenders can earn higher returns than traditional
investments through interest payments.
Working of
Peer to Peer lending
P2P lending platforms typically follow these steps:
- Borrowers apply
for a loan by providing their personal or business information and loan
requirements.
- The platform
evaluates the borrower's creditworthiness and assigns them a credit score
or rating.
- The loan listing
is posted on the platform, where investors can review the borrower's
information and invest in the loan.
- When the loan is
funded, the funds are transferred to the borrower's account minus any fees
charged by the platform.
- The borrower makes
monthly payments, which are distributed to the investors based on their
investment amount.
Pros of Peer-to-Peer
Lending
There are several benefits of using Peer-to-Peer lending. Some
of them are given below.
- It generally
provides higher returns oniInvestment than other traditional lending
methods, which is why people now love P2P lending.
- P2P lending has
lower interest rates than other lending methods because of greater
competition with the lenders.
- According to
different investors as well as lenders, P2P lending is easier to use than
other lending methods, which is why investors choose P2P lending methods
to avoid any jargon or inconvenience in their systems.
At the same time, P2P lendings also have some disadvantages,
which are given below.
Risks of
Peer-to-Peer Lending
Like any investment or loan, P2P lending carries risks that
investors and borrowers should be aware of. Some of the risks are given below.
- Different
companies have different rules and regulations. Many companies allow you
to withdraw your money early in the process. But, sometimes, it could be
tricky to withdraw your money early because some companies do not allow
this.
- If a borrower pays
back your money earlier or later than expected, then it can affect your
profits also.
These types of risks you can face in Peer-to-Peer lending that
is why it is important to understand the working of the whole process.
Which factors
should we consider before involving in P2P lending?
Some of the key factors that we should consider are given below
- Your investment or
financing goals and risk tolerance
- The
creditworthiness and financial situation of borrowers
- The fees and
interest rates charged by the platform
- The platform's
reputation and track record
- The platform's
security and regulatory compliance
Regulations
and Legal Issues
P2P lending is subject to regulations and legal issues in
different countries. One of the biggest challenges the P2P lending industry has
to face is a consistent regulatory framework. Some of the advanced countries
like the USA and UK have given a legal framework for this industry. Yet a lot
to do to make it a worldwide industry.
Other big legal issues the P2P lending industry is facing are
breaches of contract, fraud, and violations of laws. To avoid these issues, the
P2P industry has introduced a strict screening process for borrowers and
investors as well. As we all know that it is a growing industry and will stand
out in the future.
Final Words:
In this article we have discussed the working of Peer-to-Peer
lending. We have also found out the advantages and risks of P2P lending.
Peer-to-Peer lending is an ever-growing industry, it has many benefits, but at
the same time, it also has risks.
For a newcomer, it is better to start with a low
budget and gradually increase it as he becomes more comfortable with the whole
process of Peer-to-Peer lending. This industry is also facing some legal issues
in developing countries, but the P2P lending industry will hopefully overcome
these issues in the near future.