Peer-to-peer (P2P) lending is a disruptive new way for investors and borrowers to connect and get most out of their needs. It is an alternative to bank and credit card lending.
The emergence of cryptocurrencies has fuelled P2P lending. Currencies such as Bitcoin do not require a bank account, are secure and connects lenders and borrowers from every corner of the globe. Transactions done through them are also faster.
How is P2P lending different from traditional lending?
This service removes intermediary costs. Traditionally, Banks act as intermediaries – connecting investors looking for a return and people looking for credit and willing to pay an interest. And this service banks charge exorbitant fees.
In addition, with no intermediaries are in the picture, individual investors are empowered to choose who to lend to, how much and their preferred return rate. For the borrowers, they get an opportunity to get a loan with a fair interest rate from anywhere in the world.
How does Bitcoin P2P lending work?
As a lender, you choose to earn a return of say 8% on your idle cash. You look through over a list of potential loanees who are from anywhere in the world, looking for affordable loans and willing to pay back with at least 8% interest. This element of connecting the lender and borrower directly, at the lowest possible cost, is the foundation of peer to peer lending.
By using bitcoin, funds can be transferred within minutes from investors in a developed country such as the US, to one in a less developed country such as India. Often, in these countries, they face exorbitant interest rates; such loans are a welcomed relief.
In the end, it is a win-win for all parties involved. Borrowers get to fund their projects and save on high-interest costs while individual and institutional investors, earn solid returns from a diverse loan pool.
Mitigating risk on P2P loans
Just like traditional loans, P2P loans come with risks that platform providers do their best to minimize. They include defaulting risk, currency fluctuation risks and credit risks. However, systems have been designed to minimize these risks as much as possible through:
- Credit reputation systems that rank based on previous repayment records
- Loan applicant identity verification – income sources, contact details, and some personal details
- Minimum collateral requirements on some platforms
- Transparent credit profiles
- Credit models allowing lender select an optimal risk-adjusted return on loans
Before cryptocurrencies came along, it was not possible to overcome boundary and bank account restrictions. Some crypto currency based lending platforms include Bitbond, Bitlendingclub, and btcjam. Online credit marketplaces are set to restructure banking in the future, taking P2P lending to the next level.