Since 2005, when the first peer to peer company opened for business, there has only been an ever increasing interest in the model, spawning peer to peer online lending platforms all over the globe. And what with the start-ups now, the number is going to go up exponentially. But the general interest in the model aside, what makes it so popular with the lender and the borrower, who are, in a sense, the centre piece of the whole money lending arrangement? What makes it so popular for its returns?
Fundamentally it is the ease with which a lender can set a ceiling to the risk level, choose and pick who to deal with, and to some extent pick from a range interest rates. Click here for more details. And on the other hand for the borrower, it is perhaps the best alternative when they don’t qualify for a bank or institutional loan. Online lending peer to peer style like does not approach credit worthiness evaluation the same way as traditional banks do and is typically considered fairly relaxed. The high returns from a peer to peer model are also a factor that adds to its popularity.
The returns from a Fixed Deposit plan with a local banrange anywhere between 4%-7%, and maxes out at 9% for senior citizens. Other options like mutual funds, unit linked plans, recurring deposits etc. come with their typical disadvantages of lock in periods, risks and wide fluctuations caused by market volatilities.
Against this is the peer to peer lending model, a model that promises greater returns—something in the range of 6 to even 30% annualized at a relatively lesser risk level. Also, a big difference to the margin comes from dispensing the middle man, so to speak. When peer to peer lending does away without a bank, financial institution, acting as an in between, brokering the lending process between the lender and the borrower, the cost of the brokering (the whole framework) can be avoided. A cost factor completely eliminated.
Now, why wouldn’t it sound interesting to a potential investor who is looking at an online lending option that also clearly offers decisive information like default rate, average loss on default and return on loans? Information of this sort helps the lender to not only know the rates crucial to making a decision but also get into a sector knowing the pattern that will yield a particular return. Furthermore the risks associated with peer to peer lending can be more or less controlled, where a lender can make a decision to go for a high risk investment or a settle for an average rate.
Higher ROI’s come with higher risks and so to minimize risk factors, platforms often don’t put in all the money in one loan requirement. By not lending money in chunks and spreading it across, the chances of losing the whole lot is effectively curtailed. The way risk can be managed and the flexibility in investing add to the higher margins or ROI from p2p. Today they have become an ideal way to make some money from starting from small amounts.