Peer to Peer Lending Assignment Help

Peer-to-peer (P2P) lending is an option for borrowing money without the help of a traditional bank or credit union. Peer-to-Peer lending has increased in popularity for savers and investors trying to get more from their monetary investments. With low-interest rates and rising inflation, it’s no surprise that peer-to-peer lending (P2P) has evolved so significantly over the last few years.

As a student pursuing a finance degree, you need to be well-acquainted with this type of investment. But if you find it to be complicated then, we've got some valuable insights that you’ll find useful.

Peer-to-peer lending definition: What it’s all about

 It’s a type of crowd-funding system employed to raise loans for people who need to borrow from people who wish to invest. It allows people to borrow and lend money without the help of any financial institution as an intermediary. This system also helps extend credit to borrowers who are unable to get it through financial institutions.

It’s carried through an online platform where the borrowers and lenders register themselves. Due diligence is performed before allowing the parties to participate in any lending or borrowing activity. The primary idea is savers receiving higher interest by lending out their money instead of saving it, and borrowers obtaining funds at relatively low-interest rates.

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Important points to remember about peer-to-peer lending

• A potential borrower interested in securing a loan has to fill out an online application on the peer-to-peer lending platform.
• The platform evaluates the application and checks the risk and credit rating of the applicant. Then, the applicant is presented with the appropriate interest rate.
• After the application is approved, the applicants get options of investors depending on his/her credit rating and assigned interest rates.
• The applicant can sift through suggested options and pick one of them.
• The applicant needs to pay periodic (essentially monthly) interest payments and repaying the principal amount at maturity.

Example of Peer-to-peer lending

Some of the forms of peer-to-peer lending include student loans, commercial and real estate loans, payday loans, and also secured business loans, leasing, and factoring.

How does peer-to-peer lending work?

• For the lender

The peer-to-peer lending process starts when you register on a P2P platform and invest the amount you wish to lend. You’ll then have to start making lending offers to borrowers searching for a loan. Before you offer anything, you must plan how long you wish to put your money. This is generally over a certain period of years. As a rule, the longer you plan to invest your money, the higher the potential returns. 

After the money has been transferred to your peer-to-peer account, there are two ways you can lend it out. Some P2P platforms will automatically initiate lending offers to borrowers that match the loan terms on your behalf. Others will need you to do it manually. While individually managing each loan allows you maximum control, it can be more time-consuming. But if the process is automated, it speeds things up and ensures your money is always invested.

Once you’re matched with a borrower (or multiple borrowers) and the loan has been distributed, you'll start earning interest. Based on your platform, you'll be presented with management options for what you want to do with your earnings. The best platforms come up with automatic re-lending service. This is when the repayments in your account are automatically provided for lending once again, multiplying your returns. 

• For the borrower

In case you plan to borrow money through peer-to-peer lending, the process begins when you apply to a P2P platform for a loan. Most of these platforms will require you to fill out a quote request and present some proof of identity, then they will conduct a credit check to look into your credit history. 

Depending on the results of the credit check, you'll be quoted a provisional APR and also a breakdown of your prospective loan. This includes vital details like the amount, monthly cost, duration and total amount payable. You can then proceed with the rest of your loan application.

Your completed application will be evaluated by an underwriter who will make the final decision on whether you're accepted or not. They may perform a more detailed credit check, and you'll need to meet the platform's own creditworthiness checks too. If you're approved, you'll be made a loan offer and matched with a lender (or multiple lenders) who is willing to offer funds that match your quoted criteria.

The platform will serve as an intermediary, and you won't be dealing directly with any lenders, even if the loan amount comes from the lending peers. Once the loan is paid, you’ll have to make regular repayments through the platform, which will be passed on to the lenders.

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What are peer-to-peer lending advantages and disadvantages?

• Advantages:

Assured returns

It's a major advantage of peer-to-peer lending for investors. While stock and bond rates can shift pretty quickly, P2P lending is essentially following an all-or-nothing approach. Either the borrower pays off their loan, or they don't.

If you decide to invest in low-risk loans, you can expect to receive exactly the interest rate you signed up for.

An uncorrelated asset class

Many traditional investment options like bonds, stocks, and even bank accounts derive their interest rates from the market. If the economy is doing great, then the interest is good. If the economy is bad, then interest is also bad.

P2P loans are unique that way because when times are bad, demand from borrowers actually goes up. 

Diversification

A great investor understands the need for diversification in a portfolio. And most peer-to-peer lending platforms allow you to have multiple options to select from.

• Disadvantages

Risk of default

The most prominent drawback of peer-to-peer lending is the risk of borrower default. High-risk P2P lending can quickly turn into an all-or-nothing approach. Luckily, there are many platforms today working on the risk of default with new collateral options and lending pools.

Lack of transparency

Many peer-to-peer platforms are new and still working on a business model. Governments are on the fence about how to regulate them properly.

Make sure you properly assess the risk on any P2P lending platform you use. They should be able to explain where your money is going and where it’s being held.

Parting thoughts,

As with any form of loan, it's vital to take your time and think about whether it's the right option for you. Having considered all the aspects of peer-to-peer lending, you should have a better idea of how to write about it in assignments. 

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