Is peer-to-peer lending classified as alternative investment?

Peer-to-peer (P2P) lending is sometimes classified as alternative investment and is thought to be part of rapidly developing fintech sector. The possibility to create sophisticated platforms that are a mediator between borrowers and lenders gave rise to the Peer-to-peer (P2P) investment. The first ever Peer-to-peer (P2P) lending platform Zopa was registered in 2005 in the UK, followed by Prosper and Lending Club in the US in 2006. Nowadays, these companies are being regulated by FCA and SEC respectively.

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China has the most dynamic Peer-to-peer (P2P) lending market with more than 4000 providers and worth more than $93 million- figure estimated by country’s regulator in 2017. Biggest players are located in the US and the UK. PWC predicts that US market will reach $150 billion by 2025. The alternative finance market in Europe reached nearly €3 billion ($3.9 billion) in 2014. The UK represented 81% of this.

In Europe, Latvia is home to many Peer-to-peer (P2P) platforms. In Q2 2018 Latvian Peer-to-peer (P2P) platforms lent Eur 271.8 million and Eur 1.7 Billion cumulatively. Biggest players are Mintos and Twino taking over 60% and 20% of market share respectively.

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Mintos was founded in 2015 and it is the biggest Peer-to-peer (P2P) platfrom in Latvia. In September 2018 the total amount of loans funded through Mintos have suprassed Eur 1 billion. Most of the loans funded through Mintos are personal loans with car loans coming second.

Twino investment platform was launched in 2015, although the company has been operating since 2009 as a loan originator. Since the inception in 2009 TWINO has lent more than Eur 500 million in loans.

Grupeer Peer-to-peer (P2P) platform was founded in 2017 and is rapidly developing, since inception Eur 11 Million has been invested through the platform. Grupeer offers to invest in several products secured loans and real estate development projects. The yield for investors is also one of the highest in the Peer-to-peer (P2P) market – over 14%.

Viainvest, as well, is one of the oldest platforms in Latvia. Since 2008 the company has helped to fund Eur 96 million with 6% default rate.

Peerberry was founded in 2017 and offers to invest in consumer loans originated by non-banking lenders from across Europe, most of loans are coming from Aventus group. The average interest rate is 12%.

Swaper is a Peer-to-peer (P2P) platform offering to invest in loans originated by its parent company Wandoo Finance Group and offers interest rates up to 12%.

Lenndy offers to invest in loans previously issued with average interest rate over 12.4% and total loans issued so far just over Eur 14 Million.

How does it work?

The rise of fintech has made it possible to connect investors with borrowers through platforms. On one side there are borrowers who go to credit market professionals and get car loans, mortgage loans, business loans etc. These credit market professionals are in a sense loan originator. The loan originator can approach a Peer-to-peer (P2P) platform, or vice versa and request to place its loans on the platform for investing. Prior making partnership with loan originator Peer-to-peer (P2P) companies usually conduct a due diligence process, check all financials of the credit market professional and the loan quality. Then the parties agree on the interest rate that is paid to platform investors.

Rewards

There are several rewards for both parties. The loan originator can increase its liquidity needs and get extra working capital for further expansion. Additionally, loan originator will make its brand more recognizable. On the investor side there are even more upsides. Firstly, the entry is very easy- it is free to register, no commissions and starting investments are very low. On Grupeer, for example, you can start investing with as little as Eur 10. Secondly, the return on investments is much higher than return on bank deposit, on Grupeer its up to 15%! Usually, to beat the inflation and seek the superior return than offered by banks investors invest in share or bonds. However, the returns are uncertain, as they require specialist knowledge and there are high barriers to enter. Thirdly, there are variety options to diversify. To spread the risks, clients can invest various business or personal loans, choose the geography and duration. Some platforms offer real estate projects and some offer loans. On Grupeer, one of the best platform in Europe, you can find both, to satisfy investment goals of all investors. Finally, when investing through Peer-to-peer (P2P) platform, clients can earn additional rewards by referring other users.

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Risks

The Peer-to-peer (P2P) platform aims to eliminate its risks, because they are earning their money for safety they provide to clients. The possible risks are the default of the borrower. However, Peer-to-peer (P2P) platforms usually negotiate the BuyBack guarantee with loan originators. This means the loan originator obliges to BuyBack the defaulted loan and pay all accrued principal and interest. On Grupeer all loans are secured by BuyBack guarantee. Another unlikely scenario is the bankruptcy of the loan originator itself. In this unlikely scenario Grupeer will assign the group of lawyers who will represent the investors and will work on returning the invested amount.

The new technology has opened up new horizons in different areas of our lives and we have to embrace it. Now, everyone can become an investor thanks to technological advances, and Peer-to-peer (P2P) can be a real alternative way to invest.