It’s been almost seven years since the Global Financial Crisis swept with devastating effects through the entire world. While we have had “recoveries”, “upturns and downturns”, unemployment and newly created jobs, the fact remains that it is still difficult to obtain financing from the major banks unless you have near flawless credit, some form of collateral or a guarantor. Together with advances in technology and innovation, the conditions were right for the emergence of a new form of lending which enables borrowers to bypass the big banks and obtain funds directly from investors at lower rates.
This banking revolution is called social lending, or Peer-to-Peer lending. The idea behind it is ingeniously simple and maybe not even that new; connect a pool of investors with excess capital looking for higher returns with creditworthy borrowers looking for funds at better rates. By eliminating the middleman and cutting overhead you achieve both objectives so everyone wins! While this may seem like a gross oversimplification, the fact is that social lending is taking off due to its simplicity. And given that banks are highly unlikely to radically change their lending protocols anytime soon, P2P lending should continue to expand and move into the mainstream.
Borrowing and Investing
If you’re looking to borrow money at a better rates than what the banks would lend then social lending could very well be the answer. However there are still a few things you should bear in mind if you’re considering applying for a P2P unsecured personal loan:
1. Just because there are potentially hundreds or even thousands investors, it doesn’t mean that you will get a low interest rate if your credit score or financial history is not up to par. Remember, you’re dealing with real people who are investing their hard earned money with you and prefer you not to default.
2. The more detail you put in your application about the purpose of your loan (are you financing a dream wedding?) and stable financial information and employment, the better the likelihood you will be matched with an investor who looks favourably upon your transparency.
On the other hand, if you are an investor, your goal could well be to maximise your returns while minimising risk and diversifying your investment portfolio. For example, US based Lending Club, the largest P2P lender in the world, encourages investors to diversify to 800 loans or more. Diversity is key. Investors generally benefit from a well-diversified portfolio of loans, across different asset classes, credit grade, geographies, loan terms and customer profiles.
While skeptics see social lending as a passing trend, P2P loan origination figures worldwide are proving otherwise. Social lending is increasing month on month and big players are getting into the industry, including Google with its $125 million financing stake of Lending Club, making it a near certainty to continue to grow in popularity and overall lending.
Abey Malouf is the Head of Marketing & Communications at SocietyOne, Australia’s only active P2P lender. For more information on P2P lending, borrowing and investing ,visit http://www.societyone.com.au