During the last few years, P2P lending has actually become a wonderful alternative source of financing for startups and SMEs. With the help of Peer-to-Peer lending, these businesses could gain adequate funding they actually require for business development. Moreover, P2P Lending seems pretty lucrative and attractive to investors as well, thanks to its easy concept and high returns.
Certain misconceptions or myths have been associated with Peer-to-Peer Lending. Do you wish to know the reality? Here’s an attempt to debunk all those misconceptions and myths.
P2P lending actually has divided opinion. Some people are fully in awe of this industry and offer lots of praises for the sector’s capacity to effectively raise capital for businesses and to provide solid returns. There is another group of people who criticize Peer-to-Peer Lending. They believe that it is heading towards a disaster in future. Let us explore the common arguments and attempt to distinguish between the fact and the fiction.
Misconception No.1: Peer-to-Peer Lending Is Free for All & an Unregulated Sector
Many people actually believe that P2P lending is completely free to operate and has no restrictions and follows no legal regulations. This misconception is primarily based on the fact that loans are actually originated by the companies and people without any real control, unlike the traditional banks that are definitely subject to regulations. However, the truth is that all marketplace lenders are having a partnering bank that is subject to a host of regulations, legal restrictions, and parameters of a traditional banking institution. Today, most places have a set framework for the Peer-to-Peer Lending model. You may choose a licensed and local P2P lender. Visit reputed sites such as https://www.libertylending.com/ for perfect lending solutions.
Misconception No.2: Peer-to-Peer Lending Is Dangerous As You Have No Idea Who the Borrower Is
Because of the anonymity associated with the web, some people mistakenly believe that lenders would be supplying funds to basically a completely unknown person without any data. This is a figment of the imagination. Almost all P2P lenders provide accessible analytics and you could get full information about the borrowers. Today, thanks to various online sites, lenders are free to study granular-level data relating to the borrower’s work history, income, and even the debt ratios.
Misconception No.3: It Is Impossible to Accurately Measure Risk in Peer-to-Peer Lending
Some people still feel that P2P lenders cannot understand the risks and implications completely. But since Peer-to-Peer lending has grown over the years, there has been a marked improvement in analytics. All top lenders provide loan rankings that would be allowing investors to effectively evaluate the risk associated with a loan quickly. You now have full information relating to both the lenders and the borrowers. Several third-party sites provide important data including rates of return.
Misconception No.4: P2P Lending and Conventional Banks Are at Loggerheads
Even though some banks are experiencing competitive pressure from Peer-to-Peer lending companies, these two entities are trying their best to coexist and cooperate. Banks are looking for updated techniques to reach the wider and younger demographic. P2P lenders in diverse forms could be providing these inputs. Moreover, these P2P lenders could enjoy the advantage of the bank’s available huge reserve of capital.
Misconception No.5: You Require an Astronomical Amount to Get Started
Not at all! In reality, the key advantage of P2P lending is its phenomenally low entry barriers. You could start with just $25 dollars. As a Peer-to-Peer lender, you enjoy the flexibility to choose a specific loan that has an appealing tenor, as well as, an attractive interest rate.
Misconception No.6: P2P Would Be Devastated in an Economic Recession
One school of thought likes to believe that P2P sector would be suffering heavy losses during an economic recession. This is absolutely not true as the Peer-to-Peer industry has withstood the economic recession and come back with renewed vigor. They have survived the financial collapse that took place in 2008. As per some reports the P2P investors were still earning a 4% annual returns even during the devastating 2008’s financial crash.
It is pretty obvious that during a crisis situation businesses would surely find it difficult to make the loan repayments but it is more interesting to see the extent of impact on the P2P sector. Moreover, P2P loans are not dependent on the stock exchange in any way and so they are generally not affected by huge swings in the conventional markets. It has been forecasted that during an economic recession Peer-to-Peer assets would be performing much better as compared to the conventional assets.
Misconception No.7: A Rise in Interest Rate Would Lead to the Collapse of the Peer-to-Peer Industry
Peer-to-Peer lending actually emerged in the last 10 years or so when the interest rates were supposed to be incredibly low. So some people assumed that when P2P lenders will be compelled to operate in a high-interest rate scenario, they would surely be struggling as their offer might not be so enticing to businesses.
However, experts point out that the P2P interest rates are not determined by the banks and they are actually set by the demand and supply for money. This in no way would imply that the P2P industry would not be impacted by the hike in bank rates.
Misconception No.8: P2P Is a Platform for Only Young People
Even though Peer-to-Peer lending seems to be a relatively new concept that is primarily driven by effective online platforms, it does not, however, imply that its customers are all tech-savvy millennials. It is surely a misconception that Peer-to-Peer is actually reserved exclusively for the millennials. You must appreciate the fact that the millennials alone would not be responsible for the sustainable growth of the Peer-to-Peer lending market because they are not typically wealthy.
Younger generations are more likely to dabble in the P2P world due to the higher-risk nature, but recent developments have provided the platform a tremendous amount of exposure, even for older investors. There will always be naysayers, but you should know all the facts going in rather than being pressured into making a decision that might not be the best fit for you.
We are hoping that after this brief discussion on P2P lending some of the confusion and tangles relating to the P2P industry would be effectively dispelled. Keep in mind that with its incredible benefits, P2P is a very effective solution for borrowers and investors alike.