The rise of peer to peer lending

Necessity is indeed the mother of invention.

10:51 23 August 2013

The post-global economic crunch has affected savers, lenders, and borrowers alike.  When interest rates dropped to an unprecedented low, savers experienced income losses. Lenders, on the other hand suffered losses from millions of bad debts and non-performing assets. While the borrowers at the bottom of the food chain may have found it harder and harder to get fresh loans as they may have struggled to keep their credit rating squeaky clean.

Regardless of this, the truth remains that people still need to borrow money for a thousand and one reasons and investors would always want to get the best worth for their money. Thus, a new financial scheme was born and is now known as peer to peer lending, person to person investing, or social lending. P2P lending has caught on like wild fire as millions of pounds exchange hands on a monthly basis. Generally, peer to peer loans are unsecured personal loans that are issued to individuals and the borrower is not required to put up collateral to secure their loans against default. Some peer to peer lending companies are now offering business loans. 

Considering everything, it would seem that peer to peer lending has addressed two nagging problems brought about the economic crunch, the availability of a higher earning investment and a source of funds for borrowers who have been repeatedly spurned by banks with their stringent credit checks. Its appeal to the investors is understandable as some offer as high as seven per cent return or more on their money.

However, as in any type of investment, the risks can also be quite high as the industry is not yet covered by any financial regulations such as consumer protection, usury laws, as well as banking and securities laws. Lenders will have to assume the risk if ever the borrower they have chosen to lend their money to may not be able to pay back the loan. Borrowers, on the other hand could be exploited as the ease of acquiring new loans could lead them to more financial problems.