Have you heard of peer-to-peer lending? Peer-to-peer lending, abbreviated as P2P, is the practice of lending money to unrelated individuals, or "peers", without going through a traditional financial intermediary such as a bank or other traditional financial institution. You could call it a form of investing, you lend money to borrowers through an online marketplace. It means you can be a lender!
Let’s break down P2P and how you can be a lender
The concept is fairly simple - You lend your funds along with other investors at an interest rate, on which you make a return as the borrower makes their monthly repayments. The biggest difference between peer-to-peer and traditional lenders is that the loans are backed by everyday investors. Think of it as Uber, but for loans. The advantage to the lenders is that the loans generate income in the form of interest, which can often exceed the amount of interest that can be earned by traditional means such as savings accounts. Plus, they give borrowers access to financing that they may not have otherwise gotten approval for by standard financial intermediaries. Peer-to-peer is like traditional lending, but rather than going to a traditional bank for finance, one enters an online platform and negotiates directly with peers.
Peer-to-peer lending needs to be separated from the concept of online lending which refers to credit providers offering their services online. In the case of peer-to-peer lending, other consumers provide the capital which is lent to those requiring a loan. Consumers can thus act as both lenders and borrowers proving not only an opportunity to acquire a loan, but also an opportunity to invest money as one would do on the stock market.
P2P in South Africa
Despite the idea of peer-to-peer lending being fairly new to the South African market, there is evidence to suggest it may be remarkably popular with consumers. Many South African consumers are already accustomed to making use of a 'stokvel', which is mostly a form of social lending, though not on an online platform. In South Africa, a company called Rainfin, and another known as Lendico, are heading up the South African peer-to-peer lending market. Although the risk associated with the concept of peer-to-peer lending may seem to detract South African consumers from investing as lenders, current peer-to-peer lending platforms boast remarkably low default rates. In addition, many offer contingency funds which will cover losses from borrowers who default.
So what are the benefits?
The reason why peer-to-peer lending has seen such a dramatic growth is due to its ability to meet the needs of both lenders and borrowers alike. For lenders, the typical interest they receive on the money invested/loaned is better than what they may receive from a savings account. However, for borrowers, the interest is often still less than what they would pay if lending from a mainstream credit provider. The other great news is that a person who meest the criteria and has some stored up capital can be a lender!
The Bottom Line
Fincheck is excited to see what the future holds in terms of lending and borrowing, and peer-to-peer lending is surely a new way to look at things, where lenders and borrowers come together, and both benefit. If you’d like to read a bit more on how peer-to-peer lending could revolutionize the credit industry, head on over here.
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