Is Peer-To-Peer Lending A Safe Alternative To Traditional Loans?

P2P is a concept that means peer to peer and we encounter it in financial ecosystems. P2P lending means peer to peer lending. P2P lending means credit transactions developed directly between individuals, unlike traditional loans. P2P lending offers credit solutions not only for individuals but also for businesses.

Whether it is a safe alternative to traditional loan methods depends on many factors. In the P2P lending network, investors provide resources instead of financial institutions and banks. P2P lending generally offers lower interest rates and higher returns.

Nowadays, there are many P2P lending platforms, especially in the fintech field. Through these platforms, fintech startups can find resources and develop their products or services in a shorter time. Investors who receive the resources they find through P2P lending are rewarded according to the profit margin of these products and services.

Although it is difficult for me to claim that it is generally safer than traditional loan methods, I can say that it is more profitable for promising projects. Especially today, with increasing globalization and individualization, P2P lending solutions seem to become more widespread.

What Is Peer-To-Peer Lending, And How Does It Work?

P2P lending or Peer to Peer lending are credit networks where individuals or businesses offer direct credit packages to each other through an online platform. Borrowing individuals or businesses meet investors on P2P lending platforms. Investors lend money to projects that meet their specific criteria and wait for potential income.

Although at first glance P2P lending seems to be independent and autonomous from legal regulations, it is a type of loan that is valid in many official banking ecosystems. For this reason, individuals looking for customized loans for the fintech startups they have developed or businesses looking for resources for their projects should take a look at P2P lending platforms.

It is known that loans taken through traditional banking methods have high interest rates. For startups, the possibility of the project not being successful should be taken into consideration with these high interest rates. For this reason, entrepreneurs who turn directly to P2P lending solutions without getting help from any financial institution as an intermediary have access to a more flexible working area. Moreover, since almost all P2P lending platforms are online, the search for resources can be completed in a shorter time and more practically.

How Do P2P Lenders Assess Borrower Creditworthiness And Risk?

Investors who lend on P2P lending platforms also have certain criteria, just like traditional banks. Investors who provide loans in the form of P2P lending have the flexibility to evaluate the creditworthiness of the projects or individuals they will lend according to their own specific criteria. They can purchase some reporting using online banking tools.

Since P2P lending is completed on a more flexible platform than traditional loan services, in some cases, lenders can take initiative and give loans to projects or businesses that have low credibility according to traditional banking criteria. In such cases, the potential income of the project or fintech startup they invest in is decisive.

Investors who do not want to take risks and want to invest their resources in projects with higher potential income can check traditional banking criteria such as business history, even though they are on the P2P lending platform. In my opinion, the most important feature of P2P lending is its flexibility. For this reason, resources should be allocated to promising and bright fintech startups, even if they do not meet these criteria.

What Are The Interest Rates And Fees In P2P Lending?

P2P lending interest rates and fees are not standardized as in traditional banking. While it is high on some platforms, it may be lower on some platforms. P2P lending interest rates and fees vary depending on the communication between the lender and the borrower, the amount of loan to be received, and the customized terms of the platform.

A loan from a regular traditional bank may in some cases incur a lower interest rate and fees. Because traditional banks and financial institutions calculate the creditworthiness of the customer to whom they will lend and recommend packages accordingly. However, on P2P lending platforms, investors who lend money can give loan packages with lower interest rates to businesses or startups that they think have potential income based on their personal perspective.

What Are The Default Rates In Peer-To-Peer Lending?

When P2P lending is managed through online platforms, there are no default rates as in traditional banking. In particular, interest rates and fees vary depending on the specific elements of lenders and borrowers. Different rates are observed depending on the risk management policies of the platforms.

Although traditional banking offers loan packages with a longer process, it offers a more stable ecosystem in terms of interest rates. Although there may be changes according to different market conditions, it can be said that banks generally have default rates in loan packages. In my opinion, it is this flexibility that will make P2P lending the trendy financial solution of the future: the power to provide different customized solutions for different fintech projects, without having default rates.

How Can Investors Diversify Risk In P2P Lending?

There are many risk factors for investors in P2P lending platforms. Considering the possibility that the individuals or businesses they lend to may not be able to reach the potential income they offer, resources should be allocated to different projects and diversity in investment portfolios should be ensured. Failure in a project does not affect all resources and success graphs in other projects are followed.

In terms of risk management, it is quite risky to deliver all resources to a single project or business through a P2P lending platform. For this, P2P lending investors should distribute resources to projects developed in different schools. I can easily recommend this for all investment models, not only for those who are investors in P2P lending platforms.

See you in the next post,

Anil UZUN