From Patrick Watson at Forbes:
“The new way to be your own bank is as simple as it is ingenious. It’s called peer-to-peer (P2P) lending. Using any of several online platforms, both lenders and borrowers can transact loans directly…With the bank out of the equation, the borrower’s rate drops and the lender’s return goes up. The difference can be significant for both lender and borrower. And P2P can be a great portfolio diversifier if you already have stock or bond investments. Of course, rates go up and down over time, but P2P lending can earn investors a higher yield than most other fixed-income instruments—without higher risks.”
With peer to peer lending bursting into the financial services scene, P2P lenders are growing exponentially, but there is still a long way to go before they gain a significant market share currently dominated by traditional banking. The relative ease of making finance available, coupled with today’s environment of low interest rates and rising inflation makes P2P lending a viable alternative for both lenders and borrowers.
With that said, it is critical for one to understand the potential risks of P2P lending as well: the risk of default as well as liquidity risks. Investing in P2P platforms means that your cash is tied up for the loan term and selling your loans to another investor or withdrawing might not be possible. In order to mitigate default risks, it is crucial for investors to select P2P platforms that suit their risk appetite, understand details of the borrowers as well as to diversify investments. Proper due diligence can also be done to ensure that the platform is financially stable and growing in the healthy direction.