Benefits and Risks of P2P Lending


Mar 15, 2023 ·


Benefits and Risks of P2P Lending

Peer-to-peer (P2P) lending platform aligns the lenders/investors with the related issuers and borrowers generally on an online platform. Such platforms enable lenders to give loans to borrowers levying interest rates. These loan provisions are available between individuals and SMEs. P2P lending is a type of direct money lending to businesses or individuals that don't want to involve themselves when financial institutions function as intermediaries in the deal.

Such landings offer both secured and unsecured loans. Most P2P lending loans are unsecured personal loans. P2P lending is beneficial but comes with a set of risks. Want to know its benefits and risks? Keep reading to find out.

Benefits of P2P Lending
Here are the key benefits of P2P lending:

Quick and Convenient Process
P2P platforms are fully built online, which makes the application process quick, convenient, and handy when it's about quickly securing funds. The P2P platforms tend to have a list of investors eager to lend loans to the right borrowers. Thus, the time of getting the borrowers' money can get quicker, sometimes a few hours.

Access to Loans With Lower Interest Rates
Sometimes, borrowers can access loans with lower interest rates unless they have received a loan traditionally from banks or building societies. The investors directly lend money to borrowers via such platforms. Thus, no intermediary needs to associate with financial providers, which benefits both parties with more favorable rates.

No Credit Score Impact Because of Personalized Quote
Personal loans via P2P lending have become simple. The credit score doesn't get affected at all because of receiving a personalized quote. You get a better and more affordable idea of any future loan.

Alternative Option to Get Loan from Traditional Lenders
The P2P platform acts as an alternative method to fulfill financial needs, which creates a healthy market for consumers.

Transaction of Unsecured Loans and Higher Flexibility than Traditional Loans
As P2P loans are both secured and unsecured, security isn't compulsory for the loan. The application process gets fast and uncomplicated, which helps to access funds in a shorter period. Plus, P2P loans offer more flexibility than other kinds of loans. You can do an overpayment and settle the loan balance anytime without extra costs involved. You can even change the monthly repayment date suited to your finances.

Higher ROI
P2P lending generates higher ROI than other types of investments. P2P loans end to have lower interest rates due to stricter competition between lenders and lower initial fees. P2P can give you access to much higher ROI than you get via a savings account.

Freedom of Choice
A person can choose if they want to lend, depending on the borrower's credit profile.

Risk Diversification
As a P2P lending platform has got access, it helps in spreading the capital across multiple loans which activates it to diversify the risks.

Risks of P2P Lending
The risks involved with P2P lending are the risk of default by the borrower, i.e., they don't pay the interest and the principal amount. A P2P lending platform can help the lenders in recovering and filing legal notice against the default if a borrower faults. That is all a P2P lending platform can do. It doesn't guarantee the lenders' money recovery.

As the default risk is the initial risk you take as a lender, the evaluation of the potential risk a borrower brings becomes crucial. As an investor, you are totally under the control of the P2P lending platform’s assessment. You get exposed to much higher risks than you may want to if the platform's risk-scoring model isn't great and it can't gauge the borrower's risk level correctly.

Investors can diversify investments across multiple credit-worthy borrowers to combat credit risk. This step can help in largely combating risk but it doesn't fully risk-proof the investments.

In a Nutshell
The discussed points above reflect that the P2P lending platform is an excellent medium to get loans at lower interest rates and a rapid pace. It is also the right choice for those who wish to earn high ROI. No business in the marketplace comes without risks exactly the way P2P lending platforms are associated with various risk factors.

When you make and implement the right business plans, you can earn a high ROI with the least risks. This platform offers full transparency to extremely important lenders, unlike the banks' transparency situation. Online P2P lending is the most profitable option if you want to start or set up a non-banking financial organization.