p2p (peer-to-peer) lending is also known as debt-based crowdfunding, crowd-lending or marketplace lending. It is the practice of lending money to individuals or businesses through online platforms that match lenders directly with borrowers.
Who are the key parties?
- Borrowers: These are the companies that require money. Borrowers use p2p lending for various reasons: (i) banks/traditional lenders may be unwilling to lend to them, (ii) interest rates offered by the platforms are lower than banks/traditional lenders, (iii) shorter processing time at the p2p platform.
- Lenders: Lenders are investors who lend money to the borrowers for a specified interest rate, and repayment term.
- p2p Platforms: p2p platforms perform credit checks on borrowers, list eligible loans, draft contracts and facilitate the entire transaction. They earn a fee from each transaction but do not lend to borrowers. Thus, if a borrower default, the platforms will not suffer any loss. However, the platforms may suffer from reputation damage if their track record is poor.
Why is it disruptive?
Crowd-lending is disruptive to the traditional lending business because it bypasses financial intermediaries such as banks and finance companies. Imagine a business that needs capital to buy equipment. Instead of going to a bank, it can now go to a p2p platform to borrow the required amount from thousands of individuals.