Why Peer to Peer lending is a winner across investment options?

The beginning
In 2006, the world’s first peer-to-peer (p2p) lending platform, Zopa began operations in the UK. Since then peer to peer lending has spread rapidly across the globe.

Soon after Zopa was launched in UK, LendingClub was started in US. Another company called Prosper followed it. The trend quickly caught on in other countries too such as Australia, New Zealand and China.

So much so that peer to peer lending is now one of the favorite borrowing option for several people and an equally favorite investment option for investors.

Today, US has the highest amount of funds lent through Peer to Peer segment while UK ranks no. 1 on the basis of highest per capita loans.

Why is peer to peer lending gaining so much ground?

The reasons are quite simple.

After the credit crisis hit in 2008, financial institutions including banks became cautions with credit. They did not want a repeat of the horrors of the credit crisis, which almost put them on the brink of bankruptcy.

Peer to Peer lending is a winner

As a result, credit was squeezed to the consumers. They were looking for alternative avenues to borrow.

Further, interest rates too started going downwards. Investors could do just as well by keeping money under the mattress and it would have hardly made a difference.

Stock markets were in any case on a downward roll. Not to mention their volatile movements and the associated risk and uncertainty, which again did not inspire any confidence in the investor.

The conditions were thus ripe for the emergence of peer to peer lending with the benefits it had to offer not just to the borrower but also to the investor or the lender in this case.

Enter Peer-to-Peer lending

Now all those who couldn’t get the banks to fund their credit requirements started to approach peer to peer lending platforms where they found reliable credit at much lower rates of interest than what a bank would offer to them.

On the other hand, investor’s trust on the banks was dwindling. They did not want to rely on banks anymore and handle their money by themselves. Peer to Peer lending platforms brought them the opportunity to do it. It was an attractive investment option too.

Investors also realized that instead of keeping the money in the bank which hardly covered inflation, Peer to Peer lending platforms enabled them to earn a better fixed rate of interest (even after adjusting for the fees and taxes).

Peer to Peer Lending beats other investments by a mile

Not us, the numbers say so. Take a look at the table below:



Data source

In the table, we have compared various financial investments such as Interest on Fixed Deposits offered by banks, Stock Market returns and Bond Index Returns (for Investment grade corporate bonds) across 5 countries, namely, US, UK, Australia, China and India.

As is evident, Peer to Peer lending as an investment option has out performed every other investment option including stocks and safe fixed-return bonds.

It makes your money work harder for you with stable and consistent returns.

It is becoming a preferred investment option across geographies including India.
While it has grown steadily in other countries including the neighbouring China, India too is fast catching up to this phenomenon. By 2020, the size of peer to peer lending in India is expected to be at Rs. 30,000 crores.

The experience so far has been very encouraging too. The biggest risk in lending is that of default. But the loan repayment ratios are healthy specially because the borrower selection process of p2p platforms is very rigorous. For instance, i2ifunding.com has close to 100% repayment rate on the loans matched on its platform.
It is fast becoming a favorite alternative for investors seeking higher fixed income with lesser or no risk.

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