Peer-to-Peer Lending is Transforming Consumer Lending by Becoming a Major Financing Substitute for Small Businesses

  • Posted by Pragati P
  • July 1, 2016 7:48 AM BST

Peer-to-peer lending, abbreviated as P2P lending, is a money lending practice to businesses or individuals via online services utilized for matching borrowers directly with lenders. P2P platforms make revenue from the origination fees that borrowers have to pay. In addition, these platforms also generate revenue from a part of the interest charged to investors as a form of servicing fees coupled with additional charges including late fees. On the other hand, borrowers enjoy the benefits of a streamlined application process, anytime access to their loan status, and swift funding decisions.


Transparency Market Research (TMR), a market intelligence company throws light on the overall market by covering all the major aspects of the peer-to-peer lending market. As per TMR, the peer-to-peer lending market stood at US$26.16 bn in 2015 and is predicted to reach US$897.85 bn by 2024 by expanding at a whopping 48.20% CAGR from 2016 to 2024.


Q. What are the major advantages of peer-to-peer lending?


There are a number of advantages of peer-to-peer lending. This type of lending may present better rates as compared to the rates offered by traditional banks. In addition, for the investors looking for socially conscious investment, peer-to-peer lending presents the probability of backing the attempts of people to break-free from huge rate debts. Furthermore, peer-to-peer lending is also adopted by borrowers who, owing to their credit status, are not qualified for traditional bank loans. Peer-to-peer loans can also be utilized for acquiring loans within an area wherein financial institutions do not lend small-balance unsecured loans owing to the limitations in cost structure.


Q. What are the potential challenges in the peer-to-peer lending market and how can these be overcome?


Although the proliferation of new technologies and shifting demographics provide great opportunities for the market, factors such as the increasing regulatory scrutiny worldwide challenge this market’s growth. P2P loans carry a huge interest rate as compared to conventional bank loans. The majority of the loans are unsecured and all the risks are experienced by lenders, so if a small business isn’t able to make payments, lenders undergo heavy losses. Furthermore, the rising competition from traditional lenders and banks will also impact the market negatively.


However, to overcome this barrier, P2P lenders will have to reassess some of their presently utilized practices and may find benefits from collaborating with other conventional financial institutions. By doing so, some potential opportunities may be created for both parties and solutions benefitting both can be figured out.


Q. What is the predicted future of the peer-to-peer lending market?


The market is poised to rise expeditiously in the coming years. Peer-to-peer lending is being highly utilized in small businesses, consumer credits, real estate, and student loans. The development of peer-to-peer small business loans is guaranteed and peer-to-peer lending platforms have come up to fill a niche within the small business capital market.


Amongst the end-use segments, the segment of small businesses held the largest share of approximately 38% in the market in 2015 and is predicted to rise at an extraordinary 48.8% CAGR from 2016 to 2024. Consumers are on a quest for streamlined and simplified lending processes and the companies operating in the peer-to-peer market are capitalizing on this requirement. The key operators such as Prosper Marketplace, LendingClub Corporation, and CommonBond are innovating new products with cutting-edge offerings. Furthermore, Social Finance and CircleBack Lending are also targeting to raise funds for supporting competitive pricing.

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