P2P Investment Vs. Traditional Banking
There is a new buzzword in the financial market these days: Peer to Peer lending (or P2P Lending for short). So what is P2P lending exactly?
What is P2P Lending? And what are its Advantages?
Well according to Wikipedia definition: “P2P lending is the practice of lending money to individuals and businesses through online portal that match lenders with borrowers”. Traditionally, for an individual or a business to get a loan, they had to visit a financial institution such as banks or visit a local money lender. Now getting a loan in this scenario was a cumbersome and time consuming process. Getting a loan would drag on for days, needed the borrower to be physically present and moreover it wasn’t cost effective for the lender also due to physical asset requirement such as buildings etc. Factors like these also drove the interest rates high. Now in case of P2P lending, they operate online, due to this the cost of operating is greatly reduced. As a result money the lenders can get higher returns, while borrowers can borrow money at cheaper interests, even after P2P lending websites have taken a small fee for providing the service.
How does P2P Lending Work?
P2P lending platforms connect lenders with borrowers. This is done through online and mobiles portals. The idea is that many lenders can loan small amounts of money to borrowers rather than borrow a lump sum amount from a single entity. A lender is free to choose their own interests rates, and competes with other lenders for the lower interests rates through a reverse auction model. The money can be lent for various uses, both personal use (student loans, home loans, car loans etc) and for businesses, but currently most of the transactions are for businesses.
Characteristics of P2P Lending:
Although there are 3 different types of P2P lending, they all have the same characteristics. The characteristics are:
- Most of them (not all) run as for-profit organizations
- There need not be a prior relationship between the lender and the borrower
- All the transactions takes place online
- Lenders are free to choose to whom to lend money.
- Due to the freshness of this scheme loans need are typically protected by the government
Types of P2P Lending:
There are currently 3 types of P2P lending:
- Peer Lending: In this type the lender loans the money expecting the borrower to pay him/her back with the fixed interests.
- Crowdsourcing: In this type, a lender lends money not in hopes of getting the money back but for a small gift/prize depending on the amount.
- Crowd-investing: In this type, a lender lends money for a small part in the borrower’s venture. Due to this crowd-investing is limited to businesses and startups.
P2P Lending vs. Traditional Lending
Traditionally banks and other financial institutions operate on one-to-many model. That is, a bank takes people’s money and loaned to many people for various reasons. The peer 2 peer lending, like i2ifunding.com, reinvented the original model into many-to-many model. Here a borrower can raise money through small investments from various lenders. This model of many-to-many offers an advantage to the lender as instead of lender investing a huge amount on an individual or business, they can reduce their risk by making small investments on multiple objectives.
Below are the main differences between P2P lending and Traditional Lending
- Less Risk for the Lender (investments are diversified through micro investments)
- Transparency: Investors & Lenders are in complete control of whom they invest in
- Quick money borrowing as everything happens online.
- Operating costs of P2P lending is small as all of the transaction happens online
The idea behind P2P lending is not new but has been tested since “dot-com bubble burst.” It’s only recently that the idea is gaining some traction due to a shift in consumers’ mindset on online payments.
Working on the same model, i2ifunding.com is one such online platform an individual can attain maximum security while investing the money. i2ifunding.com has primed a huge network of verified money lenders and borrowers who are free to connect with each other drawing their own terms and conditions.