Also called peer-to-peer lending, group lending, market lending, or social lending, it is a method of lending to individuals or private institutions to finance their projects without any interference by banks.
It is a process or method that allows an individual to borrow and lend money without the presence of an intermediary financial institution, which brings many benefits for lenders and borrowers, as lenders can get investment returns and high profits, and borrowers will be able to obtain financial loans at low interest rates compared to traditional methods. Typically, these lending operations occur via electronic platforms that bring together borrowers and investors.
Business models used in peer-to-peer lending
Some of the most common forms of group lending are:
- Traditional P2P Lending: Traditional P2P lending refers to the lending and borrowing of money between individuals and institutions through a single intermediary. The traditional lending model consists of three components: the supply side, represented by the investing individuals or institutions; On the demand side are borrowers who are individuals or institutions. and the platform that represents the broker side, which attracts borrowers and investors.
- P2P Lending with Loan Originators Model: A loan originator is a non-bank financial institution that uses marketing methods to attract borrowers who want to obtain a loan, and this institution convinces the borrowers of the distinctive benefits of the loan you offer them.
- Bank-funded P2P Lending Model: This model is very similar to the traditional model; the difference between them is that the loan in the bank-funded lending model is created by the bank.
Advantages of peer-to-peer lending
- Peer-to-peer lending or group lending provides investors with high investment returns compared to other types of investments.
- It is considered one of the easiest sources of financing, as it is easily accessible compared to traditional loans.
- It features low interest rates. This is due to the increased competitive power among lenders to attract borrowers to them.
Disadvantages of peer-to-peer lending
- Peer-to-peer lending or group lending may be subject to high credit risk.
- There is no insurance or protection by the government for the lenders in case they are exposed to any default or fraud by the borrowers.
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