A brief introduction to P2P lending
P2P lending is a brand new investment class gaining popularity as a relatively safe and profitable way to invest. P2P lending brings investors (lenders) and creditworthy borrowers together, enabling investors to earn an attractive interest rate. To safeguard the interests of the investors, P2P lending platforms, like LenDenClub, have diversification mechanisms in place. These are used to spread the investors’ money over multiple loans to minimise the chances of a default.
Credit seekers are also screened based on 200+ factors to ensure the safety of the lenders’ investment.
This means, that besides being an excellent way to invest money P2P lending is emerging as a solution to the access to credit challenge in our country.
As a result of the unique advantages that P2P lending offers to investors and borrowers, the popularity of the investment class is only expected to grow, maybe even beyond that of bank lending.
Current Market Trend of P2P Investment
Peer-to-peer lending is being viewed as a viable alternative to bank lending. This becomes apparent with a glance at the following market trends:
Future of P2P Lending Market
Can P2P lending reinvent banking? The answer might be a yes.
The future of the P2P lending market, as apparent in the market trend numbers mentioned above, looks quite bright. It would not be too ambitious to expect P2P lending to surpass bank lending in all areas.
Within the P2P lending market, the online P2P lending segment currently holds the biggest market share at 97%, and this trend is expected to continue. This is because, besides enabling contactless instant investment and quick loan approval and disbursement, online P2P lending platforms like LenDenClub incur lower overheads. The benefit of this lower operating cost can be transferred directly to the lenders and borrowers on the platform, making them even more attractive to investors.
How is P2P different from banking?
Before we talk about the differences, let’s discuss a similarity between bank and lender mortgages. Did you know that you are the actual lender in both cases? If you have been wondering where banks get money to lend to borrowers, the answer is from the deposits made by the bank’s customers. Meaning, that in both cases, your money is being used as a source for debt financing.
When one compares P2P lending vs. banks, the differences are pretty stark. From an investor’s point of view, P2P lending presents an investment opportunity that trumps fixed deposit rates and is not influenced by market volatility like stocks.
On LenDenClub, the returns that lenders make consistently outperform savings account and fixed deposit rates. At the same time, diversification of investment and stringent screening of credit seekers makes P2P lending a safer alternative to stocks, ideally suited for risk-averse investors.
Besides viewing their credit history, several other crucial factors like the financial discipline, income, and financial habits of the potential borrowers are evaluated before they are allowed to use the platform to avail of credit.
Investors can make up to 12% average returns and the default rate for the loans averages between 3% and 4%. This is considerably higher than the 5%-6% return paid by banks on FDs.
Borrowers on LenDenClub are evaluated using 200+ parameters. This type of creditworthiness screening is different from how banks evaluate credit seekers.
Even from a borrower’s point of view, getting a loan from a P2P lending platform is an attractive option. As mentioned earlier, a big reason behind this is the quick credit evaluation and disbursal process. The other reason is that the borrower’s performance in the credit evaluation can enable them to get a loan at lower interest rates.
During the evaluation, the borrower is graded on a scale of 100. Borrowers with a higher score can usually avail of financing at a lower interest rate. In comparison, having a better credit history offers no benefits to borrowers getting a loan from a bank. This is why P2P is better than banks. Another is the lower interest rate associated with P2P loans in comparison to bank lending rates.
Advantages of P2P over banking
In India, the inflation rate has crossed the 6.5% mark, which is almost as much as the interest rate paid by banks on fixed deposits. At the same time, the international chaos brought about by the COVID-19 pandemic and the ongoing Russia-Ukraine crisis has made stock markets simply too volatile for investors with a small risk appetite.
In such a scenario, P2P lending looks like a dependable investment option. Since investors can earn up to 12% average interest on their investments, the returns are enough to outperform most traditional investment instruments, including many mutual funds.
Moreover, to safeguard investors against fraud and losses, investors can allocate a maximum of ₹2000 per borrower on the LenDenClub platform. To make investing more accessible, investors on our platform can start with an investment as small as ₹500 per borrower.
In other words, in comparison to traditional banking, P2P platforms offer a lucrative alternative investment class for investors and easier access to funds for creditworthy borrowers. By eliminating the middleman, the bank, the investors can get higher returns, and the borrowers can get loans at relatively lower interest rates.
In conclusion, the P2P lending sector is definitely something that potential investors should check out with an open mind. The market trends indicate that the P2P lending industry is here to stay and modern investors should not ignore the advantages offered by the P2P lending model.