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.
Source: Shutterstock
This method of lending is fast and efficient and therefore often lowers the cost of a loan for borrowers, as well as providing 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 to 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.
And these stalwarts have been originating more loans than ever before. Here is the US market’s performance over time:
Source: Crowdfundinsider
Peer-to-peer lending is now originating over $500 million in loans per month, led by Lending Club. That’s impressive for an industry basically founded only eight years ago, and shows that demand is on the rise with 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 get a loan for things traditional lenders might be wary of.
In fact, debt consolidation loans are one of the most popular peer-to-peer lending loans according to Prosper, one of the lender leaders in this industry.
Source: CreditCards.com
And trying to get a loan from a bank or other traditional lender for a bitcoin miner would be very difficult unless a 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 and therefore spread 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 industry, but by diversifying investments in many different loans, investor risk can be reduced.
Source: LendingMemo
Data culled from Lending Club shows that investors placing funds in many different loans are able to realize a return that is much better than a high yield savings account, and sometimes even better than that of a mutual fund.
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
Because banks that lend out money are complex organizations, they have very high overhead in operating costs. Also, banks have to comply with more regulations than peer-to-peer marketplaces.
Running a bank is expensive, and this cost is passed on to borrowers in the form of pricey fees, high standards for loan approval and long lead times.
Source: Foundation Capital
Lending marketplaces are a faster and less expensive proposition for everyone involved. The whole process is simpler when compared to what the banking industry must do to lend people money and is usually (almost) fully online based.
Where BTCJam Stands
BTCJam is a unique peer-to-peer lender in several different ways.
- By utilizing an uniques in-house credit scoring system, we can help anyone obtain a loan when a borrower supplies us with certain information – instantly creating a credit profile.
- 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 the local currency whenever necessary.
These factors are key reasons why we are able to provide investors great returns.
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