P2P Lending

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Definition and description from http://www.p2p-weblog.com/50226711/p2p_borrowers.php


See the full entry on P2P Finance for a broader context.


Description

From the Wikipedia:

"Person-to-person lending (also known as peer-to-peer lending, peer-to-peer investing, and social lending; abbreviated frequently as P2P lending) is a certain breed of financial transaction (primarily lending and borrowing, though other more complicated transactions can be facilitated) which occurs directly between individuals or "peers" without the intermediation of a traditional financial institution. Person-to-person lending is for the most part a for-profit activity, this distinguishes it from person-to-person charities, person-to-person philanthropy and crowdfunding which also create connections between donors and recipients of donations but are nonprofit movements." (http://en.wikipedia.org/wiki/Person-to-person_lending)

P2P Lending

From the P2P Weblog at http://www.p2p-weblog.com/50226711/p2p_lending_overview.php

"P2P lending is a new application for P2P services and technology. It directly connects and provides benefits to individual lenders and borrowers. P2P lending bypasses banks and other formal financial institution. It's often called Social Lending, since part of its appeal is the person to person nature of the service.

P2P lending services are not financial institutions. They do not guarantee loans or rates. They are an exchange or intermediary that facilitates the matching of lenders and borrowers and the transfer of funds and payments.

The service may include social networking features, such as photos, borrower Q&A, friends, borrower recommendations, community groups, and listing sharing. Loans are generally small, typically $1,000 to $25,000 and spread out over many lenders who can loan as little as $50." (http://www.p2p-weblog.com/50226711/p2p_lending_overview.php)


P2P Lending Borrowers

"P2P lending borrowers pay lower interest rates since there is no bank overhead. Loan payments are automatically withdrawn from the borrower's regular bank account.

P2P lending is similar in many ways to eBay. Borrowers create a listing where they specify the amount, loan duration, and loan interest rate they seek. Additional information can include the reason for the loan and other personal comments. Listings may be able to be watched, emailed, linked to, bookmarked, promoted, or even reported if improper.

There is a financial valuation that can include a personal budget, income and asset verification, and credit check, to determine the credit worthiness of a borrower. The lower a person's credit risk, the lower their interest rate and loan payment will be.

Lenders bid on borrower offers. Upon a successful bid lender funds are automatically deposited into the borrower's account." (http://www.p2p-weblog.com/50226711/p2p_borrowers.php)


P2P Lenders

"Lenders on the P2P lender sites receive excellent returns compared to bonds plus the satisfaction of knowing they are directly helping other individuals just like them.

Lenders can search for borrowers by a variety of factors, such as keywords, type of loan, credit criteria, and amount of loan funded.

Lenders can easily spread their loans among multiple borrowers. Such diversification ensures a relatively low risk and reliable return.

Loan payments are automatically deposited in the lender's bank account. P2P lender services employ collection agencies to maximize payout. Delinquent and defaulted accounts are reported to the main credit reporting agencies." (http://www.p2p-weblog.com/50226711/p2p_lenders.php)


Models

Via the Wikipedia: [1]


"Various models and variations of person-to-person lending services have evolved based on different combinations of the following main parameter settings:

   * Direct vs. indirect lending
   * Secured vs. unsecured lending
   * Prior familiarity of lenders and borrowers
   * Services offered


Direct vs. indirect lending

Direct lending

In this model, the lender lends money to one specific borrower based on his/her credit rating; the risk of capital and interest for the lender is that the borrower could default on the loan. Lenders have mitigated this risk by investing small amounts into a large number of loans so that only a small amount of money is loaned to any one person. See also direct loans.

Indirect lending

In this model (also known as 'pooled lending'), the lender lends the money to several borrowers with similar credit ratings; the risk of capital and interest for the lender is defaulters in the pool. The risk of capital and interest of the lender is reduced considerably because the impact of any one default is made trivial in light of the timely payment of the vast majority of the notes outstanding; both many-to-one or one-to-many credit structures may be involved. This model is very similar to the traditional bank model and does not allow the lenders to select individual borrowers. See also pooled investment.


Secured vs. unsecured lending

Secured lending

In this model, the lender gives money to the borrower against the strength of the collateral given by the borrower. For loans that are originated in the United States it is common to file a UCC-1 form. Each state has a different form. See also asset-based lending.


Unsecured lending

In this model, the lender gives money to the borrower based on the credit rating of the borrower. The lender runs the risk of the capital and interest in case of failure on the part of the borrower. Two variants have evolved in this space. See also unsecured loans.


Prior familiarity of lenders and borrowers

Unfamiliar lenders and borrowers

In this model (also known as 'marketplace lending'), the lenders and borrowers are previously unacquainted or do not have a prior personal loan agreement. The system enables individual lenders to locate individual borrowers and vice-versa and connects them through an auction-like process in which the lender willing to provide the lowest interest rate "wins" the borrower's loan. The marketplace process may include other intermediaries who package and resell the loans, but the loans are ultimately sold to individuals or pools of individuals.


Familiar lenders and borrowers

In this model (also known as 'family and friend lending'), the lender lends money to a borrower based on their pre-existing personal, family, or business relationship. The model forgoes an auction-like process and concentrates on formalizing and servicing a personal loan. Lenders can charge below market rates to assist the borrower and mitigate risk. Loans can be made to buy homes, personal needs, school, travel or any other needs.

A special case of this model is community lending in microfinance where a loan is made to a specific individual but the lending agreement is structured to hold the borrower's social group either directly accountable for the repayment of the loan (akin to "cosigning") or indirectly accountable, whereby the entire social group may face future consequences, such as reduced access to credit or higher future rates, if one of its members fails to repay an obligation.


Services offered

Loan origination

The services offered include matching borrowers to lenders, calculating interest rates and repayment terms and disbursing funds.


Loan servicing

The services offered include formalizing loans by creating written documents, establishing payment schedules, ensuring timely payments and collecting funds from one party and transferring them to another." (http://en.wikipedia.org/wiki/Person-to-person_lending)

Example


Discussion

P2P Lending as Full Reserve Banking

Izabella Kaminska:

"An interesting point was made by Francois Carbone, CEO of an equity-based crowdfunding venture Anaxago. Namely, when you think about it, every peer-to-peer initiative (P2P) on offer today is really representative of a move towards a private sector version of full-reserve banking.

That’s whether the P2P ventures are equity-based (as in Anaxago’s case), reward-focused, donations-based or even if they focus on traditional interest-based lending.

And that, of course, is because most peer-to-peer lenders operate almost exclusively in the world of existing money. They do not, unlike conventional lenders, get involved in the business of money creation, parallel currencies or seigniorage.

They simply redirect what’s already available." (http://ftalphaville.ft.com/2013/05/14/1497952/p2p-as-full-reserve-banking/)

More Information

  1. P2P Finance
  2. Prosper
  3. Zopa

Article:

  1. Klafft, M. (2008) Online Peer-to-Peer Lending: A Lender's Perspective, Working Paper available on SSRN.com, 5pp.
  2. Kurnia, J. (2010a) “Does P2P Lending Work for Microfinance? Lessons from Zidisha Inc.”, guest article on: p2p-banking.com, August, 2010.

See also:

  1. A directory of Social Lending initiatives is maintained here at http://www.wikiservice.at/fractal/wikidev.cgi?EN/BarCampBank/BankAndFinanceWatch
  2. Lendstats: lendstats.com; the leading source for independent verification and analysis of the numbers hawked by P2P lending sites.