August 13, 2013
The Benefits of Peer to Peer Lending: Is this Right for you?
Source: Emily Goodwin is a project manager for Be The Lender, a Peer to Peer lending company. With many years of experience, she knows a thing or two about the benefits of lending and borrowing through this type of system.
It doesn’t matter what you call it: peer to peer lending, person to person lending, or social lending, this involves the practice of lending money to “peers,” without having to deal with a traditional financial institution (such as a bank or credit union).
Although peer to peer lending is a relatively new approach to lending, there are quite a few websites facilitating these deals and helping people on both ends of the spectrum.
The Ins and Outs of Peer to Peer Lending
On the surface, this may sound like a risky proposition for both lenders and borrowers. However, as you learn more about this type of financial transaction your level of stress will decrease.
Since I don’t have any personal experience with this, I reached out to Emily Goodwin. She is part of the Be The Lender team, and was kind enough to provide the following information:
1. What are the benefits of peer to peer lending for the actual lender?
The benefits of peer to peer lending for the lender are fantastic. Although the lenders are loaning their money, a huge benefit is that they will generate income in the form of interest which more often than not exceeds the amount they would earn through traditional financial institutions. This is especially true to banks which hold savings in accounts offering up to 3%. To savers this is unsatisfactory, but through peer to peer, savers can potentially earn up to 10 times this amount dependant on which platform they use.
Peer to Peer lending allows lenders to make their own assessment of a borrower’s application as all the necessary information is provided, including a company history, the loan purpose and company financials. This gives the lender the ability to consider the risks and make an informed decision as to whether they would like to lend to that company or not.
It also gives lenders the opportunity to participate through a variety of efficient and easy to use platforms suitable for UK and international investors, all of which offer business or personal loans and each company offering unique benefits. Each platform offers a variety of loans, all providing comprehensive data including: credit ratings, terms and interest rates, giving the lender a collection of loans to choose those which are best suited to them. Should the lender need access to funds before the end of the loan term, a secondary market enables lenders to re-sell loan parts.
Most Peer to Peer companies do not directly handle the lenders cash, it is held in a client account which is segregated from the company’s accounts. The peer to peer company can see and transact through the account, but should they go bust it does not form part of the assets.
2. Why would a company opt for this platform as opposed to a traditional bank loan, for instance?
This platform matches borrowers to lenders directly, cutting out the middleman. The lenders dictate the rate according to the bids placed in auction, and if the application becomes over funded the borrower can choose the lowest rates and lenders. Due to the financial crisis banks are hesitant to lend, they have restricted their underwriting criteria considerably leaving businesses struggling to get cash at a time when they need it the most. Business owners are having to look to other solutions in order to grow and develop. Peer to peer gives borrowers another avenue to raise funds in order to expand their business.
This avenue offers the borrower lower interest rates, a choice of how long they want to loan the money for and some platforms may also consider alternative forms of security which would usually be ruled out by traditional financial institutions. So even if a company’s credit rating is low they still have a better chance of obtaining funding through peer to peer, it is just dependent on whether lenders accept the risk of the security, but when the risk is higher so is the rate.
There is also potential to attain the funds a lot quicker, this would depend on the length of time the loan is on auction for and whether lenders see potential in the loan application and want to bid.
3. What do you feel is the biggest myth associated with peer to peer lending?
The biggest myth associated with peer to peer lending is that it is risk free and this is not the case. Any lending opportunities come with risk. People generally think that only companies that own premises or whose directors can pledge their property have excellent access to credit, whereas decent, small companies without security will struggle. That’s not true. If you are a good company, well run and want to expand and need cash to do it, the market on peer to peer lending platforms will make its own mind up. Through peer to peer, loans can be offered with or without security. A security offered with a loan gives added peace of mind to the lender and should the company fail to meet repayment plans it enables the power to repossess assets. But lenders make their decisions based on common sense. If a company doesn’t have the top credit rating it doesn’t mean they will be unable or any less likely to pay back the loan. Lenders should use the information provided to make an informed decision and assess what level of risk they are willing to take.
Now that you know more about peer to peer lending, I have a question for you: is this something you will consider in the future, either as a lender or a borrower? If you answer yes, it is safe to say you will be part of a growing community.