Peer-to-peer lending is a relatively new concept that helps borrowers find great deals on loans. In order to finance these types of loans, peer-to-peer lending relies on individual investors who fund each loan in small amounts.
This method of lending is fast, efficient, and often lowers the cost of a loan for borrowers; at the same time, it provides a stable rate of return for investors.
Why does peer-to-peer lending offer a higher ROI compared to other investment methods? Let’s take a look at 5 compelling reasons why this form of lending is beneficial not just for borrowers but also for the investors who back these loans.
A Proven Model
Ever since Lending Club and Prosper were founded in the United States in 2006, the industry for peer-to-peer lending has been booming.
These stalwarts have been originating more loans than ever before. Here is the US market’s performance over time:
Peer-to-peer lending is now producing over $500 million in loans per month through Lending Club. That’s impressive for an industry founded only eight years ago. It is clear that demand is on the rise and there are no sign of slowing down.
An Avenue for Specific Borrowing
Whether it’s paying down debt or financing bitcoin miners, peer-to-peer lending allows borrowers to obtain loans for things traditional lenders might be wary of.
According to Prosper, debt consolidation loans are one of the most popular peer-to-peer lending loans.
For a bitcoin miner, trying to get a loan from a bank or other traditional lender would be very difficult unless the borrower could provide a specific business case for doing so.
The bottom line is that peer-to-peer lending allows individual investors to be creative in deciding what types of loans to fund for borrowers.
Spreading out the Risk
Those who invest in peer-to-peer loans are able to diversify, therefore, spreading out risk by funding many different loans.
It’s important to understand that borrowers sometimes don’t pay back loans, known as a default. It’s something that cannot be avoided in the peer-to-peer lending industry and even in regular banks. If investors diversify their investments through many different loans, overall investor risk can be reduced.
Data pulled from Lending Club shows that when investors diversify their funds through many different loans, they are able to obtain returns that are much better than a high yield savings account. Frequently, these peer-to-peer funds outperform mutual funds and other money management funds.
Helping Borrowers with Not So Perfect Credit
Many borrowers on peer-to-peer lending sites are looking for access to low interest rates while often not having a perfect credit score.
This is one of the reasons peer-to-peer lending has become so popular: it can be easier to get a loan on a peer-to-peer marketplace than going to a bank. For some borrowers, alternatives such as payday loans may levy interest rates at 15%+ p.m, plus fees.
Prosper credit scores in 2013. Source: Orchard
The average credit scores in the 660-670 range on Prosper’s lending marketplace constitute what credit scoring systems would consider “good” borrowers. This is in between the lower-end “fair” and the upper “excellent” tier of borrowers through the FICO scoring system.
Cheaper for Borrowers, Good for Investors
Large corporate banks are complex organizations. During the process of a loan approval, the loan goes through many different channels which leads to very high overhead in operating costs. Banks have to comply with more regulations than peer-to-peer marketplaces, therefore, interest rates and overall APR can be extremely costly.
Banks pass the cost of running their banks onto borrowers in the form of pricey fees, high standards for loan approval, and long lead times.
Source: Foundation Capital
Peer-to-peer lending marketplaces are a faster and less expensive for everyone involved. The whole process is simpler in comparison to what the banking industry must do to lend people money. Due to the lending process being entirely online, peer-to-peer lending market places create an easy and user friendly way to apply for loans.
Where BTCJam Stands
BTCJam is a unique peer-to-peer lender in several different ways:
- By utilizing our unique in-house credit scoring system, borrowers can instantly create a credit profile when they supply us with certain information. As they complete more of their profile, their credit score becomes more accurate and generally improves. A full profile also has the benefit of creating more trust for investors.
- We are able to leverage the low costs of capital in the developed world with the high costs of borrowing in many countries. Because of this global advantage, we can return to investors a better rate of return and provide more affordable loans for people in developing countries.
- Because we use the digital currency bitcoin as a transaction protocol, we can connect borrowers and investors globally – a borrower can convert a loan and investors can convert their profit into local currency whenever necessary.
These factors are key reasons why we are able to provide investors great returns.
Here’s how to learn more about investing in bitcoin loans on BTCJam’s marketplace.