Introduction To P2P Lending Marketplace
P2P lending or Peer to Peer lending is the practice of borrowing money through online platforms that match borrowers with moneylenders. It’s a popular option in contrast to the more conventional routine with regards to getting money from banks and non-banking financial institutions (NBFIs). One of the biggest advantages of using an online P2P lending platform is that the advances are generally less expensive as the stages work with bringing down overheads and programming controlled mechanization. The P2P loan specialists charge cash for the stage and doing credit checks for borrowers.
How Does P2P Lending Work
With P2P lending, it’s not the company operating the marketplace that lends money, but people interested in ‘investing’ their money does. The platform acts as an intermediary between the borrowers and lenders.
Technically, the P2P lending platform has two users:
The lenders enroll on the platform and complete a verification step to end up verified lenders. They, at that point, choose the amount they need to invest and transfer that amount to the platform. The money is divided up into units – termed generally as ‘Notes’. The value of the unit varies with the platform. So, if a platform decides the unit note to be valued at $10 and an investor decides to invest $10,000 she’ll end up with 1000 notes to invest in borrowers.
Borrowers, after registering on the P2P lending platform, go through a verification process and a credit check. A credit check is performed to identify the risk required for putting resources into the said borrower. The credit check outcome determines the rate of interest for the borrower.
One loan is typically funded by multiple investors. An investor willing to invest 1000 notes can choose 10 different loans with 100 notes each or can blend and match the sum with advances. This diversification of portfolio works in the investor’s favor by reducing the risk. It’s a manifestation of the classic proverb – “don’t put all your eggs in one basket”.
Creditworthiness In P2P lending platforms
One of the most important tasks for the P2P loaning commercial center is to have the capacity to decide, as precisely as could be expected under the circumstances, the financial soundness of borrowers. The financial soundness of a candidate in the United States is controlled by the FICO assessment, the FICO score being the most prevalent credit scoring model. Moreover, there are three different credit rating organizations in the US – Equifax, Experian, and TransUnion.
P2P loaning stages tie-up with an outsider credit organization to pull in the borrower’s credit score. At that point contingent upon the plan of action, they should think about just the credit organization’s score or may process their own particular scores utilizing extra information. A considerable measure of P2P loaning organizations incorporate the social information and additionally other openly accessible information in their credit report. Churning the numbers through their own particular calculations, they choose whether a borrower is fit for offering an advance to and at what interest.
The rate of intrigue given to a borrower varies with their credit score, amount applied for and the time of credit. Correspondingly, a lender is offered a higher rate of interest for their loan, in the event that they contribute with borrowers having is a lower credit score. High risk equals even with, higher reward.
Market and Way Forward
The P2P lending market is relatively new. One of the first P2P platforms – Zopa, was founded in the UK in the year 2005. Prosper and Lending Club was founded in the United States in the year 2006 and 2007 respectively.
The global financial crisis of 2008 and 2009 played a major role in shaping the wave of financial disruption through technology, referred to as Fintech. Major losses suffered by banks resulted in reduced loan disbursements with heavier scrutinies and tighter processes. The exposed fragility of the traditional banks went on to induce a general dissatisfaction amongst the public. All this opened gateways for smaller companies with the superior technology to move in and promote the idea of alternate financing. P2P lending is a big part of the alternate financing.
Technology disruption of the financial market is one of the most exciting and interesting trends to follow. Innovation drives change that’s worthy of impacting millions of people. P2P lending is one such market, and we can’t be more excited to see how it shapes up.
We worked with some of the biggest names in the Fintech industry and helped them set up the technology that impacts millions. Harmony – the leading P2P lending marketplace in New Zealand in one of our case studies.
If you’re looking to enter the P2P market and are looking for financial software consultants, we’d love to talk to you!.
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