A peer-to-peer (P2P) loan is a bankless loan, as it is a private loan in which private investors lend money to private borrowers. In most cases, only an online platform acts as an intermediary in the asset class of P2P loans. This form of money lending and borrowing is becoming increasingly popular in America and Europe offering investors attractive returns, especially in these times of low-interest rates.
P2P financing: first blossom after the financial crisis
One disadvantage of financing via the principal bank in difficult times is that additional loans require collateral or, even better, additional equity. Those who do not have family-and-friends funds or are too small for financial investors have had an alternative since the late 2000s in the form of P2P financing when banks are no longer able to help. The abbreviation P2P stands for peer-to-peer. In finance, P2P financing refers to loans or equity funds arranged via Internet platforms, in which private and institutional lenders make the funds available to those seeking them. Some use the term crowdfunding here. Funding stands for financial resources and crowd explains the origin of a larger group of people who collectively provide these funds for a specific purpose.
With the financial crisis, crowdfunding experienced its first heyday, especially in the U.S. and the U.K., as banks sharply reduced lending to small and medium-sized businesses due to the risks involved. According to a report published by Allied Market Research, the global (P2P) lending market alone is expected to have reached a volume of $67.9 billion in 2019. The volume of the 25 largest platforms worldwide for financing loans and equity adds up to more than 100 billion euros, according to P2PMarket-Data’s statistics. A comprehensive insight with worldwide statistics on various forms of P2P financing is provided by the “Global Alternative Finance Market Benchmarking” of the University of Cambridge.
How does the market for P2P loans look like today?
The acronym P2P stands for peer-to-peer, which in this context means as much as from person to person. P2P loans are mostly brokered via the Internet, eliminating the bank as an intermediary. Online platforms for P2P loans bring together private investors and borrowers. The fast and uncomplicated online application process is just one of many factors contributing to the growing popularity of P2P loans. This year alone, according to Statista, the total transaction volume in the credit marketplace (P2P) segment will amount to 107 billion dollars. More than 214 million disbursed P2P loans are already forecast for 2022.
P2P credit – loan of the future?
The largest market for P2P loans is currently still in China: This year, a total transaction volume of 71.7 billion euros is expected. Across Europe, the UK is ahead with a planned personal loan volume of 3.4 billion euros, and in a global comparison it is even in third place behind the USA.
In any case, the potential is huge, and it is becoming increasingly apparent that P2P loans are not just a trend, but rather the loan of the future. While there are more banks in Germany than in Italy, Spain, the UK, and France combined, the industry is undergoing a transformation. The new digital technologies and the growing online offering are not leaving the largest banking markets in the USA unscathed and are having a strong impact on the number of credit institutions and bank branches in the USA.
P2P loans as an attractive investment
If you want to invest your money profitably, overnight money and fixed-term deposits have long ceased to be an option. An investment in P2P loans offers investors with a clear conscience the opportunity to increase their capital despite low interest rates. Investors can generally choose who they want to lend their money to, but it is advisable not to finance an entire loan yourself, but to spread your investment. Auxmoney, for example, recommends investing no more than 25 dollars per loan to achieve the average return of 5 percent, to spread the risk. In the long run, however, it is tedious to choose the loans you want to invest in yourself. Fortunately, most platforms offer automatic investment tools. There, one can simply specify the desired risk and the tool will invest the money automatically.
However, a P2P loan does not only offer advantages on the side of the investor; personal loans are also becoming increasingly popular among borrowers. On the one hand, this is due to the mostly uncomplicated online processing, but also to the fact that the chances of obtaining a loan from a private party are usually higher than from a bank.
Will peer-2-peer funding survive the Corona crisis?
The Corona crisis is the first real acid test for P2P finance platforms. The outcome is still open, because at the moment platforms are in the eye of the hurricane. Eleven and a half years after the start of the hot phase of the financial crisis in the fall of 2008, there is once again a mood of alarm in the global economy. The global lockdown has led to the closure of entire business sectors, such as the travel and trade fair industry and the catering and events industry. The crisis is disrupting supply chains and causing unemployment rates and corporate bankruptcies to skyrocket, leading to government budgets with unprecedented deficits and causing renewed turmoil in the financial system.
In macroeconomic terms, the Sars-CoV-2 corona virus, and the Covid-19 disease it unleashed have simultaneously triggered a negative demand shock and a negative supply shock, a condition for which economics textbooks provide no blueprint. States and central banks are aware of the danger to the economy and are trying to counteract it. Whether this will really succeed will only be seen in a few months, if not years.