What is Peer-to-Peer Lending?

The financial industry is developing fast and we can observe the addition of new alternative lending platforms, and one of them is Peer-to-Peer (P2P) Lending. It is a fast developing market for individuals and small business to lend or borrow money. In this kind of lending, the web is used as a platform, which is P2P company websites, to connect investors and borrowers. Thus, saver lends funds directly to the borrower.

The P2P platform uses proprietary algorithms. It assesses the credit risk of potential borrowers and determines what interest rate to charge. P2P company websites provide a way to transfer funds from the lender to the borrower and the same mechanics are used to repay the money with interest according to the agreed contract. These websites offer a great reduction in transaction costs of getting a loan; it allows borrowers to enjoy lower interest rates; and offer higher interest rates to lenders. P2P operators are like traditional bank, but they do not solely rely on the customary mechanism of credit analysis of the customer's banking data. Traditional loan assessment (character, collateral and cash flow) is also done by P2P Operators, but together with new data and other assessments. They go beyond credit scoring models found in banks in their use of technology and data. Now, operators also use alternative sources of information, including social media, such as: behavior, characteristics, and contacts. Using these data, it provides new opportunities for credit assessment analysis of the computer algorithms.

This kind of lending system sounds good and has a potential to dominate the traditional financial institution, but you also have to know its risks for both lenders and borrowers. P2P operators should be able to protect the borrower's identity and at the same time, they should also select suitable borrowers and take appropriate action to maximize recoveries. You need to be aware of issues with the companies, their ability to protect both lender and borrower, and their marketing strategies.