Why are lenders attracted to P2P?
Over recent years peer-to-peer lending has really taken off. In the UK, thanks in large part to new governmental regulation and oversight, and the introduction of peer-to-peer ISAs, the industry is enjoying unprecedented media coverage, participation and growth, with many financial institutions now clambering aboard the bandwagon along with regular members of the public. So what is it that attracts so many lenders to P2P?
It could be said to boil down to three key ingredients:
● Return
● Safety
● Goodwill
Consumer credit has long been recognised as one of the best returns available, hence the popularity of store and credit cards to brands. During the financial crisis which we are now hopefully seeing the tail end of, many people were looking to increase the earning power of their investments however they could, and P2P was a solid bet.
When it comes to safety of investments, peer-to-peer is a very transparent process, and can be quite low-risk if done right. The borrowers are, by and large, prime, since they are choosing to go the P2P route rather than through a bank primarily because they have lower interest rates. P2P platforms rigorously check the credit records of their borrowers, and grade them, allowing lenders to choose which class of borrower to invest in. This is a big reason why loan defaults in P2P are incredibly low. Because minimum investments are also usually very small, it’s easy to build a diverse portfolio of loans to further reduce risk.
Lastly, the reason many people choose to invest through P2P is they know they are directly helping small businesses to survive and grow. Often these will be businesses that operate in their own area. It’s the perfect way to boost the economy both local and global through the power of positive investment, and help people out whilst avoiding the big banks that we have grown wary of.
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