What is peer-to-peer lending?
P2P lending is part of the rapidly growing and evolving economic model of the shared economy. This type of lending allows people to take the role of a bank and give loans to other people through an online P2P platform. The principle of operation is simple: the potential borrower applies for a loan, the platform estimates his creditworthiness and gives him a rating, then lists the loan application together with information about the borrower in the platform and allows investors registered in the platform to finance the loan. The platform is an intermediary between investors and borrowers and protects the rights of both parties. The loans can also be financed by non-bank financial institutions, called originators.
The platform offers better services from banks and this is why they reduce costs because everything is online. Instead of having fees that go to the banking institutions, these funds will be distributed among the participants in the service.
Major technological advances and the global reach of the internet have enabled platforms to turn their service-focused ambitions into an exciting and powerful reality. At the best P2P platforms, it typically takes only minutes and a few clicks to sign up and start taking part, which is well suited to today’s fast-paced world.
What is the future of peer-to-peer lending?
Since its establishment, peer-to-peer investing has seen nothing but growth, and that trend looks set to continue. According to the report “Peer to Peer (P2P) Lending Market: Global Industry Trends, Share, Size, Growth, Opportunity and Forecast 2021-2026″, the global peer-to-peer (P2P) lending market exhibited strong growth during 2015-2020. Looking forward, the market is expected to grow at a CAGR of around 31% during 2021-2026.
Main factors driving the growth of global peer-to-peer lending
- Increasing digitization in the banking industry. This is one of the key factors driving the growth of the market. Digitization in the banking sector adds transparency over traditional banking systems, which in turn is expected to fuel the market growth.
- Small and medium-sized enterprises (SMEs). These small-scale organizations require financing alternatives with minimal charging fees and convenient repayment options.
- Less operating costs and lower market risk. P2P lending platforms also eliminate the cost of establishing physical branches, staffing, and maintenance, thereby gaining preference among the masses. Moreover, as the coronavirus disease (COVID-19) continues to spread across the globe, P2P lending is gaining immense traction for obtaining unsecured loans to cover treatment expenses.
- Banks’ inability to offer favorable rates to savers, people looking for more opportunities to diversify their investments, and increasing confidence in online financial services and peer-to-peer networks. And, with just 7% of people have used a peer-to-peer lending service, according to an EY survey published in the Financial Times, it seems that the sector is nowhere near reaching its full potential.
- A growing student population that prefers loans at a lower interest rate is expected to boost the growth of the peer-to-peer lending market size. Additionally, increasing awareness pertaining to clearing personal debt as soon as possible is another reason for the increased acceptance of the peer-to-peer lending market.
- Increasing real estate lending is anticipated to drive the market further.
It’s worth remembering that P2P lending is a relatively young industry that hasn’t been exposed to the full stress test that other lending institutions have been subject to over the decades. However, while new risks, like rising interest rates and regulatory pressures, may prove to be tough challenges that need to be overcome, the future for peer-to-peer lending looks very bright indeed.