How P2P Lending differs from other Financial products
Table of content
Difference Between P2P Lending and Other Financial Products
P2P Lending vs. Traditional Financing
Peer-to-peer vs. Cryptocurrencies
Introduction
Peer-to-peer lending is a type of financial technology that eliminates the need for individuals to go through banks to lend or borrow money from one another.
Websites that facilitate peer-to-peer lending link investors directly with borrowers. The site determines the prices and terms and makes transactions possible.
Difference Between P2P Lending and Other Financial Products
P2P lending has the distinctive characteristics of an alternative asset class and has the potential to provide attractive returns. Compared to other financial products, the peer-to-peer lending market allows investors to create enormous profits by repaying loans and interest.
P2P Lending vs. Crowdfunding
When compared to the other investment instruments such as P2P Lending, equity crowdfunding is the more risky option; yet, one may argue that the offered incentives reflect this. Consequently, equity crowdfunding platforms generally aim at seasoned investors, individuals with a high level of financial competence, and a comprehensive understanding of early-stage firms and their risks.
The story of risk and potential return associated with peer-to-peer lending is lower, and the level of predictability is higher. This is only a high-level perspective; if you go further into specific platforms, you'll find hundreds of variants on the models described before, individually with their benefits and drawbacks.
Risks Involved with Peer-to-Peer vs. Crowdfunding
Although p2p and crowdfunding are intriguing options, equity crowdfunding is the most common type of crowdfunding investment.
These are not only helpful for increasing your asset base, but they also make it much simpler to diversify your investment portfolio. However, similar to any other type of investment, they also carry a significant risk.
Crowdfunding risks
Low Liquidity
The ease with which you can dispose of your asset in the future is referred to as its liquidity. For the sake of convenience in taking their money out, investors should give top priority to assets that have a high level of liquidity.
Fraud
A dishonest firm or business can steal money from investors by exploiting loopholes or asymmetric knowledge.
Equity Dilution
Any investor who does not purchase the new shares may have to face equity dilution, which is the weightage of their share decreasing.
If a company issues more shares in the future, it can affect the price of the previous allocation, and any investor who does not purchase the new claims may have to face this possibility. It is necessary to recognize that there is always the chance of watering down the product.
The Possibility of Failing
You need to be aware of the fact that the majority of new businesses fail before you put money into one. Suppose you are interested in investing in a new business venture.
In that case, you should investigate the project's history and evaluate the likelihood of its success or failure before making any financial commitments.
P2P Lending Risks
Need to Make the Required Interest Payments
Borrowers can fail on their interest payments; because this can result in a great deal of complexity, it is strongly recommended that investors only put their money into platforms that can be trusted.
The Risk of Concentration
When you lend a significant amount of money to a single investor, you expose yourself to a high level of risk.
Breach in Terms of Payment Regarding the Principal Amount
In the same way that some borrowers may default on the interest payments, other borrowers may also fail to pay the principal amount.
P2P Lending vs. Traditional Financing
Compared to traditional financing such as certificates of deposit supplied by banks, certificates issued by private lenders might generate several percentage points higher returns than those provided by banks or credit unions.
Many folks would rather know who they're giving loans to and why they're asking for them. They can pick borrowers who, in addition to creating a sense of success, they believe will be able to repay the loan on time and in full.
There is an obligation to donate to borrow money. Suppose a potential borrower has a credit history that raises questions but has a compelling tale to tell. In that case, the lender may be willing to fund the loan even though the return on investment would be reduced in exchange for taking on additional risk.
There is the potential for a genuine feeling of community on a platform that facilitates peer-to-peer loans. On forums with an active community, users are ready to discuss their experiences lending and borrowing money from one another.
The P2P lender's planned policy adjustments are currently the subject of heated debate. Some people view banks as the scourge of their existence, and as a result, they will do all in their power to steer clear of them.
Most notable differences that can be found between conventional forms of finance and those offered by peer-to-peer lenders:
A Look at the Interest Rates
P2P lenders often can provide lower yields than traditional banks because they have lesser overhead. This is because most peer-to-peer lenders are linked to a peer-to-peer platform, which lenders use to authorize loans and receive their income.
Convenience
An applicant can submit an online request for a loan through a peer-to-peer lending platform, then provide the necessary documentation to a third party who will travel to their location to collect it and finally receive the funds in their bank account or another financial institution of their choosing.
Consequently, it is easy and uncomplicated to do within this framework. When applying for a loan using a traditional method, you must physically go to a bank and hand in your application and any necessary papers and other supplies.
In addition, the time it takes to distribute the funds is often far longer than it is with peer-to-peer lending. It is easy to comprehend the factors contributing to the expansion of the peer-to-peer lending market. Despite this, it is undeniable that there are several advantages to banking with a financial institution.
As a result of their bigger size, they can provide a wider variety of financial instruments and perks, in addition to other kinds of advantages.
The Methods That Are Used to Obtain Loans
The procedure for approving loans through P2P lending is significantly less complicated than the one used by conventional banks.
Several peer-to-peer lending websites will provide loans to borrowers regardless of their credit history. On the other hand, a traditional lender will always pay attention to a circumstance such as this one.
P2P lending vs. Bonds
When determining whether to invest in bonds or peer-to-peer lending, there are various considerations to take into account, including the following:
Amount
If you have significant capital available, consider investing in peer-to-peer lending and bonds to get the most out of your money.
Age
Your age should be considered when deciding what kind of investment to make. P2P lending is an example of an asset with a high potential reward and risk, but if you are young, you can get away with picking an option like this.
However, if you are an older person, choose an investment with a lower level of risk, such as bonds, to avoid putting your retirement savings in danger.
Goals
Your goals will also affect the kind of investment you decide to make. P2P lending is an option if you want your money quickly but are willing to take on a greater risk of losing it. Bonds are preferable if protecting your capital at the expense of very little return is your primary objective.
Investing in bonds or peer-to-peer lending is ultimately up to the individual. You can select the most appropriate investment vehicle for your needs, provided that you first determine your investment objectives before deciding.
P2P Lending vs. Stocks
Over the past century, investing in the stock market has consistently ranked among the most successful and widely used strategies for accumulating wealth.
A significant number of people either need more information to begin investing in the stock market or are simply unable to cope with the unpredictability and volatility of the market.
Although investing peer-to-peer has only been available since the financial crisis of 2008, it is an investment that has the potential to produce returns that are both greater and more steady over time.
The following are some similarities and differences between peer-to-peer lending and the stock market:
Return
Your rate of return from the stock market will be determined to a considerable extent by the kind of investments you make, the length of time you keep your money in the market, and the investment strategy you use. It's possible that:
An individual who chooses their stocks: If you select your stocks, you will know the rate of return on your investment.
Investors who put their money into professionally managed mutual funds. If you outsource your investing to a fund manager, they will likely inform you regularly about the return of your total portfolio.
A passive investor through index funds or exchange-traded funds (ETFs): if you invest for more than 20 years and select a low-cost index fund, historical data shows you would receive a return of around 8%.
Liquidity
The stock market is more fluid than the P2P market; if you sell your assets on the stock market, you will have the money in your account in days rather than weeks or months.
If you are currently getting dividends, you will continue to receive those payments quarterly until you choose to reinvest them. This differs from investing through peer-to-peer platforms, characterized by a wide range of liquidity options.
Safety and Risk
The stock market's track record may be verified based on its long and illustrious history. In the short term, it is unpredictable, yet, in the long run, its behavior becomes more predictable.
Suppose you are planning to make investments for a long time, and your portfolio already contains low-cost and diversified assets. In that case, the stock market is not considered an extremely high-risk investment option for you.
If you are a day trader and enjoy the stock selection, the stock market is a lot riskier for you, and if you are a novice, you stand a good chance of losing a significant amount of money.
Because peer-to-peer investment has only been operational for a little more than a decade, its track record is significantly shorter than traditional investing.
There is always the danger that borrowers could default on their payments, which will delay the time it takes for them to pay you back. As a result, this investment is not risk-free.
Peer-to-peer vs. Cryptocurrencies
Alternate ways of investing include things like peer-to-peer lending and cryptocurrencies. Even if it is plausible to argue that both of these deserve a spot in the portfolio, the conclusion ultimately depends on the goals that you have set for yourself.
Let's evaluate them concerning other aims and determine how they measure up: P2P lending is the way to go if you want to retire early on monthly earnings since it is relatively stable, more predictable, and may offer a regular income.
This is because P2P lending allows individuals to lend money to one another via the internet. When it comes to cryptocurrencies, the objective is to generate massive gains as quickly as possible, but you also need to be prepared to create significant losses.
To achieve the aim of increasing portfolio diversification through investments in P2P lending and cryptocurrency, choose both! If you are looking for investments that won't put you under unnecessary stress and will give steady and predictable returns on your money, consider including P2P lending as a part of your portfolio.
Conclusion
Peer-to-peer lending platforms may be a preferable option for newly established firms with no credit or cash flow history, businesses with low credit scores, and businesses with unconventional or inventive loan requests. The online lending marketplace generates revenue from the fees that borrowers and lenders pay.
