Today’s borrowers and investors have a large range of financing options at their disposal. Of all of them, modern peer-to-peer (P2P) lending platforms are gaining the most traction when it comes to growth and popularity.
This model of investment has broken down the borders, getting rid of expensive “middlemen” to provide borrowers with reduced interest rates and investors with diversified portfolios, delivering high returns.
As with all aspects of financing though, P2P lending has been associated with certain risks and push-backs, particularly by misunderstood individuals and media commentators. Here are some common myths about P2P that need debunking.
1. Peer-to-Peer lending is the new fad
While the history of P2P lending has been short compared to traditional lending services, there has been nothing but increased growth in consumer demand since its arrival. This sector is not a fad or passing trend but in its coming of age.
The P2P market is set to be worth more than $44 billion by the year 2024. The innovation P2P brings is its sophisticated use of technology, which naturally appeals to a growing number of people. It fills a credit gap in the market, catering to those borrowers who are underserved by traditional banks.
2. Peer-to-Peer lending is only for risky borrowers or millennials
There’s a common misconception that P2P lending is used only by the younger generations or as a last resort for borrowers.
While millennials are increasingly turning to P2P lending platforms because of its ease and convenience, the belief that it’s a sector dominated by a ‘tech-savvy generation’ is incorrect.
In fact, studies have shown that over half of P2P investors are over the age of 55. Moreover, the small percentile of millennials wouldn’t nearly be as much to sustain such rapid growth that the P2P lending market is witnessing.
There’s also this idea that P2P is a last resort for borrowers who are refused credit by banks. Again, this is untrue. Accessing finance via P2P is the preferred option by a range of borrowers and demographics. The variety of online lending services appeals to anyone who wants more flexibility and competitive rates.
3. The Peer-to-Peer market is not regulated
The P2P sector has been regulated by the Financial Conduct Authority (FCA) since 2014. Over the past decade, P2P has integrated into the global financial services industry as a developed and stable sector and is recognized as a legitimate investment vehicle.
All serious players in the P2P lending market are regulated through a rigorous process conducted by the FCA, protecting the interests of their customers.
It is important to note that while many P2P lenders are fully authorized by the FCA and are reliably and professionally run, there are others who are not. Consumers should always check that the P2P lender they select is FCA regulated and to be wary of platforms that cite 3rd party’s regulated status.
4. Peer-to-Peer platforms are risky for investors
It’s important for investors to realize that there is a degree of risk with P2P lending. However, the P2P sector caters to varying levels of risk. Some platforms are secured while others are unsecured.
Investors should understand the difference and learn how the platform can recover your money if the borrower they’re matched with defaults. Reputable P2P lenders will provide some sort of buffer against credit losses.
5. You need a lot of money to get started
While some types of investments require a lot of money to get started, P2P lending is accessible to most income levels. The return on investment varies depending on the choice of loan, conditions, and degree of risk bucket, most consumers can easily make a low-threshold entry into the P2P lending space.
Many P2P lenders provide investors with high levels of transparency and control, with investors able to set their own rates and the lowest rate on offer is then matched to the next borrower loan.
Summing up
While it’s important for a consumer to do their research before using any financial service, P2P lending is generally a safe and risk-free alternative to traditional loan lenders. Despite this, a lot of discourse in the media presents P2P lending as a risky avenue — yet fail to back up their claims.
A lot of these common myths about P2P lending have been debunked in this article in hopes that consumers can consider its benefits since the P2P market is a promising mode of borrowing and lending that continues to grow rapidly in popularity.