The History of Peer-To-Peer (P2P) Lending
Peer-To-Peer lending, commonly referred to as P2P, has been growing in popularity since the early 2000’s financial crisis. Ever since, this form of lending has evolved and spread to almost every corner of the world.
The first company to provide P2P loans was Zopa based in the U.K. As it stands, China leads the way when it comes to Peer-To-Peer lending, the practice having started in the country centuries ago.
This form of lending has however been shrouded with a lot of mysteries which we intend to demystify.
What Is P2P Lending (& How Did It All Begin)?
Peer-To-Peer (P2P) is a practice whereby people lend money to other people or businesses through online services that specialize in matching borrowers to lenders. It can also be envisioned as a decentralized form of money lending program, whereby people can offer direct loans to other people in need
Given that P2P services operate online, they are known to enjoy lower overhead costs thus able to offer cheap loans compared to other providers.
Peer-To-Peer lending has been in operation since the 1700’s whereby renowned Irish author, Jonathan Swift, lent small amounts of money to people in need without charging any interest. In China, this form of lending has been in operation for centuries. As e-commerce sprung up, P2P evolved and became an essential part of the country’s financial sector.
In Europe, P2P gained prominence in the 18th and 19th century as people’s preferred choice of accessing quick capital. However, its popularity took a hit in the 20th century as banks sprung up and took over the financial sector.
The emergence of the internet in the 21st century has once again reinvigorated peer-to-peer lending as people across Europe continue to shun banks and other financial institutions given the cumbersome procedures one must partake to access a loan.
How Peer-To-Peer Lending Works
While the idea of Peer-To-Peer is relatively simple, there are things that one needs to grasp prior to venturing into the space, as a lender or borrower. At the top of the lending chain, are companies that facilitate a platform where borrowers and lenders interact and do business
For lenders, one needs first to decide how much money they wish to lend and for how long. Borrowers, on the other hand, need to provide details about themselves and the amount of money they wish to borrow and for what purposes.
P2P platforms analyze credit reports of borrowers and use the information along with other data to assign a risk grade. Loan requested are normally posted on the website where investors review them, in search of borrowers and loan requests that meet their risk/reward return.
Should a lender be impressed with a given loan request, he can go ahead and give the go-ahead for his money to be used to finance a given loan request. If a loan request is quite big, the amount can be split into parts for various lenders to fund it.
Borrowers usually receive the money electronically and are required to make payments over the agreed period electronically. P2P platforms keep an account of borrower’s credit reports, vital information used to determine the terms they can be offered in future.
Why Peer-To-Peer Lending?
The fact that anyone can borrow from anyone, is one of the catalysts behind Peer-To-Peer growing popularity. Borrowing money from banks and other financial institution is known to come with cumbersome procedures and requirements that most people don’t like.
P2P lending have evolved a great deal all in the effort of trying to attract more clients. Simplification of the lending process has been a game changer in the evolution of the lending scheme.
A higher rate of returns, on capital invested, compared to things like savings account is another reason behind an influx of lenders in P2P platforms. Such platforms are also believed to have a higher level of access, to finance borrowers of all walks of life, with improved levels of transparency.
The Growing Popularity of P2P Lending
In the aftermath of the 2008 financial crisis, P2P popularity reached fever pitch to the disadvantage of large financial institutions that ran a monopoly when it came to lending. Given that these platforms offered worrying advantages that major institutional lenders could not compete against, all but guaranteed their survival and future in the highly competitive lending business.
P2P has caught most banks off balance given that they act as direct competitors for borrower’s attention. For instance, Wells Fargo once banned its employees and staffers from engaging in any form of P2P lending. In the ban, the giant financial institution claimed that the practice posed a conflict of interest. However, it reversed the ban in 2014.
As the saying goes “if you can’t beat them join them”; so are financial institutions getting their hands into the Peer-To-Peer lending business. Santander became the first financial institution to offer a form of Peer-To-Peer lending scheme. Ever since, a number of banks led by RBS and NatWest have ventured into the marketplace in pursuit of borrowers looking for cheap loans.
Most Popular P2P Lending Platforms in Singapore
Just like other financial hubs in the world, Singapore also plays host to a number of Peer-To-Peer lending platform that continue to record booming business. Estimates put at 60, the total number of P2P lending platforms in the country
Funding Societies: Funding Societies is Southeast Asia’s leading peer-to-peer financing platform, and the first to crowdfund more than SGD 130 million, the largest crowdfunded SME loan amount in the region in about 2.5 years.
With Funding Societies, one can invest with an amount as low as $50. Credit-worthy SMEs that require funds may secure business loans from $5,000 up to $1.5 million.
FundedHere: Fundedhere is another local crowdfunding platform that offers equity crowdfunding. The platform specializes in connecting tech-focused startups in the region with accredited and renowned investors.
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