Peer-to-peer (P2P) lending has rather short history compared to classical banking. Though, on the other hand, despite of almost ten year history (Zopa in UK launced in 2005), not too many people understand the concept of P2P lending itself. But those who really do, they have been pointing out several pros in which I would like to discuss about.
Couple days ago there was published an article in Estonian media (estonian written, paywalled) regarding P2P lending. It appeared that several debt counselors recommended not to consolidate loans with P2P lending instruments, which made me wonder if they are getting anonymously paid by banks? Or how else would you describe debt counselor reluctance to P2P sector? Is it the ultimate protection of classical banking or do they really suggest people to file personal bankruptcy?
Yes, there is absolutely no point to compare home mortgage APR (APRC)* with P2P lending APR (APRC) when you are able to apply first one for debt consolidation. But are we able to get one instead of other?
What are the options to get a small loan for debt consolidation, travelling, home improvement and etc?
- loan from a friend or relative (APR (APRC) depends of your negotiation skills, usually there are no loan contracts and it all goes for trust)
- quick loans/ SMS-loans (APR (APRC) over 50% and up to thousands of percents)
- peer-to-peer lending (APR (APRC) 20% – 40%)
- small loans from banks (APR (APRC) 20% – 40%)
Of course there is an option not to finance anything and go bust (or continue living in same conditions), but that is not case in lending perspective, because lending comes relevant in a point where loan application has been put into work.
As you could see than the best option would be getting a loand from a relative or a friend. Usually they just give you the money and you promise to pay back any time soon. But do all of us have such a good relative or friend with piles of money stading and waiting to be lent out? Somewhy I doubt about it, which means we have to compare official financial instruments available on market.
Quick loans get the most attention in Estonia. There are several companies offering small quick loans which APR (APRC) is frightening. But if we put into perspective, quick loan amounts are usually pretty small and the overall quick loan market would sum up as payday loan sector (at least to me). The other two options are classical banking (small loans) or P2P lending. These are the ones available on market for almost anyone.
If we compare the three loan options, we could see two main characteristics on the first place: payday loans compared to consumer loans (let’s not count in credit cards because they are not too widespread in Estonia). But there is also one other difference: quick loans and classical banking loans are offered by companies, when P2P loans are funded by different investorst, not a single firm. So the first big vantage is buried to here: P2P lending is widespread, offering investment opportunities to all the people in the world.
I don’t want to be the Robin Hood of P2P lending, but I like more equality than todays world is offering to us. And again that doesn’t again mean I want communism back (hell no!). Rich people are getting richer faster than ‘poor’ people. In fact, 1% of people in world control 50% of worlds wealth. P2P leding gives an opportunity for middle and lower class to start investing more easily. It is rather complicated to buy stocks because it needs usually more money (and knowledge) than we can get out of our paycheck at once. In my humble opinion there is no point to buy shares from Baltic Stock Exchange less than 500€ budget at a time and you still have to consider pretty good downside risk due to small diversification rate of your portfolio. Diversification is the second best thing in P2P lending. You don’t have to own 500€ to get a stake in a loan. But if you have the 500€ then in isePankur you could get up to 100 loan parts for 500€ (5€ is minimum lending amount). In that case if 1 loan goes bust, your portfolio has still 99 good slices left. In Omaraha.ee you could get 50 loan parts, because there is a limit of 10€ minimum to a loan.
Somehow debt counselors think investing via P2P lending is much more dangerous compared to other vechicles, but I can’t see why. Yes, today we can’t postpone income taxes from gained interests, but if isePankur and Omaraha will do enought lobbing, then in future we might have it.
For lenders the best part of P2P lending is the knowledge that money comes from other people, not companies, and interest will be also paid back to other people, not companies. If I remember correctly (out of the huge information stream we have today) then there has even been good examples when people are filing for bankruptcy, but still try to pay off firstly loans taken from other people aka via P2P lending.
In conclusion: Why I love peer-to-peer lending?
a) we can have another investment vechicle on the market to choose
b) small amounts needed
c) rather easy to build up well diversified portfolio
d) pay interest to other people, not to companies
* APR (APRC) is annual percentage rate (annual percentage rate cost) (in estonian: KKM ehk krediidi kulukuse määr)
If you see mistakes in use of language or in article construction, please feel free to write me commentary in below. Lets make things better together!