Strong Growth in Personal Loans With P2P Lending Leading Charge
Personal loans have recently experienced a surge according to a report posted at SMH.com.au. The article cited a strong increase in applications for personal loans during the fourth quarter of 2016, which was 12.4 percent higher than during the same period in 2015. The increase was largely credited to peer-to-peer, or P2P, lending, which is extremely popular in the United Kingdom, United States and Australia. Alternative financing strategies have become common in Britain and other English-speaking countries on account of worries over the economic consequences of Brexit.
Angus Luffman, an official spokesperson of Veda, commented on the trend: “Growth in personal loan applications is predominantly coming from products offered by new entrants in the personal loan space, beyond traditional credit card and auto finance markets.” New marketplaces can offer higher rates of interest to everyday investors than they can earn from banks. Originating in the United Kingdom, P2P lending is also being explored in the United States according to GTNews.com. The European Union is also thinking about establishing soft regulatory policies for P2P lending.
P2P Lending Ignites New Growth in Personal Loans over the Internet
Most of these emerging personal loans are called P2P loans, but some analysts believe that “peer-to-peer lending” is just an umbrella term for organizations that recruit investors who aren’t affiliated with any bank or credit union. There’s no requirement that borrowers or lenders share peer status in demographic profiles, industries, geographical locations of other characteristics. Here’s how the P2P lending process works:
- The lending companies follow traditional banking practices such as offering lower interest rates to people with better credit scores.
- Investors set their own limits on how much they risk and how long they invest.
- In some cases, investors and borrowers engage in a bidding process that matches borrower needs with lender requirements.
- Unfortunately, investors don’t qualify for any government loan guarantees.
Many analysts credit the rise of alternative financing for personal loans to the wave of financial improprieties discovered in the aftermath of the global financial crisis of 2008-2009. According to a NASDAQ.com report, Reuters reported that 20 of the biggest global banks were fined $235 billion for engaging in various misdeeds such as manipulating interest rates, currency trades and mortgage applications. These fines were levied between 2008 and 2015. The processes of regulating banks, identifying misdeeds and getting compensation for victimized consumers often involve years of investigations, legislative fixes and court battles.
The prolonged period for making changes in bank policies for personal loans helped to generate the market for alternative financing. Consumers wanted the more agile borrowing options that P2P lenders could deliver. The NASDAQ report offered this insight into the phenomenon: “The opportunity in the global peer-to-peer market will be worth $897.85 billion by the year 2024, from $26.16 billion in 2015. The market is anticipated to rise at a whopping CAGR [Compound Annual Growth Rate] of 48.2% between 2016 and 2024.”
What Exactly Is Peer-to-Peer Lending?
Investopedia.com defines peer-to-peer lending as a method of financing that bypasses traditional banking interests and financial institutions. Individuals and borrowers can agree on terms without using a bank to broker the deal and take a cut. This eliminates the intermediary, which allows the borrower, lender or both to get better terms. Depending on market conditions, the lender usually receives better terms because he or she takes greater risks.
Originally known as “social lending,” this practice works especially well for personal loans online. Lenders can generate higher returns on their investments than they can earn by parking their savings in banks. Borrowers get greater access to funding–especially those consumers who don’t qualify for loans from traditional financial brokers. The social factor can apply to lenders who want to offer loans to their peers, but that’s not required.
Personal Loans Online Become More Competitive
Personal loans online are leading the recovery of online lending according to a report posted at Independent.co.uk. Lenders have greater options for obtaining essential credit for personal loans through expanded borrowing options, which also ignite business lending. The United Kingdom has sparked this global financial recovery by using creative lending strategies for alternative financing. The report suggested that U.K. citizens are feeling more confident in their financial prospects, so they’re willing to invest in agile personal loans for the chance to earn a greater ROI.
The U.K. economy has recovered dramatically during the past year, and much of this can be directly attributed to P2P personal loans online. The United States and other countries have experimented with P2P lending, and even China is experiencing growth based on alternative financing. Both borrowers and lenders can cherry-pick each other based on interest rates, easier approvals for people with lower credit scores, personal or peer connections and other factors. Small loans can be offered at higher interest rates than banks charge, and the tradeoffs are higher approval rates and more flexible repayment terms. P2P personal loans offer the following competitive advantages:
- Attractive and competitive interest rates
- More flexible terms for personal loans
- Fewer administrative costs
- Ability to get approved by telling an appealing story
- Faster funding
Some Experts Disagree About the Significance of the the P2P Trend
Businessinsider.com quotes a Deloitte study of peer-to-peer lending in the United Kingdom and Australia that found it unlikely that personal loans online will ever be dominated by P2P lenders. Neil Tomlinson, Deloitte’s chief of U.K. banking, downplayed the idea that P2P lending would pose a threat to traditional banks. The report concluded that entry-level companies would face a host of challenges if they were ever to capture a significant percentage of the market for personal loans.
These challenges include banks taking steps to counter the threat, greater regulatory interest from global government authorities and the inexperience of these lenders in managing fraudulent practices, employee malpractice, hacking activities and other business threats. It wouldn’t require many financial losses–without any government guarantees for P2P personal loans–for investors to abandon P2P lending for less risky investments.
Another unknown consequence of marketplace lending involves global interest rates and politics. P2P lending emerged during uncertain financial times when voters approved transformative political decisions such as Britain’s decision to leave the European Union and Donald Trump’s election in the United States. During this period, interest rates were at historic lows, but most experts predict rising interest rates and inflationary pressures. These occurrences could easily disrupt alternative financing. Find out more about personal loans online and global financial marketplaces at the Personal Money Store.