Many people think peer-to-peer (p2p) lending is the democratization of finance. This species of crowd funding allows almost anyone to loan money to interested borrowers. It can work for almost anything, even student loans. It is even possible now to loan money directly to an entrepreneur in another country. Potential lenders log onto a website and see all the loan requests, vetted by the platform based on credit worthiness. A person can invest as little as $25 to fund only part of a loan, or the whole thing, with principals of up to $35000. However, many are worried the p2p lending may be a victim of its own success.
One of the main attractions of peer-to-peer (p2p) lending is that it allows investors to be matched directly with borrowers, leaving credit agencies and banks on the sidelines. Until recently, p2p lending consisted of mainly of loans to pay off credit card debt and payday loans. However, as it has matured and proven itself as a source of financing, small business loans have started to be offered. Lured by a return diversified from existing markets, private equity groups have begun to participate in p2p markets. As reported in the financial times, the two largest p2p lending platforms in the United States, Lending Club and Prosper, have both had to take steps in order to curb “sophisticated investors” from snapping up the best opportunities. By sophisticated investors the author most likely means computer algorithms programmed by veteran high-speed traders at a hedge fund. They even have funds that specialize in the p2p market. A secondary market for p2p loans is in the works as well. While many feel that this will crowd out the retail lender, one of the main draws of this type of financing is the sense of community that one gets from not dealing with a financial institution. The funds also add legitimacy and much needed liquidity to the market, and competition amongst lenders should ultimately make rates better for borrowers.
Much has been said about the desire for the FED to stimulate the economy more through low interest rates and quantitative easing. Negative interest rates are even discussed as a way to get money off the sidelines. Peer-to-peer lending is one way to get money working again. It offers people looking to start or grow their business the chance, and it even provides a better alternative to those struggling with credit card debt, as the interest rates can be much cheaper then a carrying a balance on the card. Originally all the funding came from regular people. However, due to their success, private equity groups have taken notice of the opportunity, and are stepping up to provide more money and opportunity. In order to stimulate the economy further both at home and abroad, a greater portion of investors should follow suit and pursue peer-to-peer lending and other crowd sourcing methods. These methods provide diversification from equity markets and allow anyone to directly invest in small business across the world.