Change is said to be constant, and change cuts across every sector of human existence. In the business world, information technology is the catalyst for change.
Ever since the introduction of information technology into the business world a lot of business rules have changed.
Information technology first changed the approach from the traditional buying and selling, sourcing of funds, sourcing of products to a more modernized and very easy one, now a lot of these business activities can be done online.
Finance is the bedrock of every business, and it involves the management of funds whether an investment, lending, saving, borrowing.
The incorporation of technology in finance is called Fintech, called in full Financial Technology.
This describes any technological efforts that improve the use and delivery of financial services.
Nowadays traditional banking services have been relegated as a last resort, as many financial services are now conducted through online platforms.
Even loans are taken online, and an example of such is Peer to peer lending (P2P), a type of loan service done online.
It involves the bypassing of financial institutions while utilizing middle-men to lend money directly either to an individual or a business.
How Peer to Peer Lending Works?
Peer to peer lending is a form of crowdfunding, it utilizes a good number of economic activities integrating them into fintech processes.
A P2P platform combines the function of market exchange with that of a stockbroker and then presents them to the end-user who utilizes their services.
The borrowers and the lenders subscribe to the P2P platform and they are matched according to their needs and specification.
The peer-to-peer lending platform then charges them of the service provided.
The P2P platform only intervenes where necessary, in cases where there are overdue payments.
Peer-to-Peer lending has low liquidity and variability as risk is shared amongst several people and the interest rate at which the loan is given is low too.
Advantages of peer to peer lending
There are some advantages of peer-to-peer lending that easily gives it an advantage over the traditional loan services,
Easy access to fund
The P2P platform provides easy access to funds for most of these borrowers without asking for collaterals.
The investment gives a high return
Investors in peer-to-peer lending platforms have good chances of getting high returns as their funds are diversified during investment.
Interest rates are low
The rates at which the loans are repaid are generally low, this is because P2P loans usually have a high number of willing investors.
Timely release of loan
In the traditional financial sectors, there are various requirements before loans can be accessed, and most times before those requirements are met a lot of time would have been spent. P2P lending reduces this time constraint.
Disadvantages of peer to peer lending
Peer-to-peer lending has disadvantages too which can be:
High credit risk is the major disadvantage P2P lending has since there are no collaterals before loans are given.
There are chances for fraudulent services, as borrowers are known by just the information they provided about themselves.
In some regions, there are no laws governing P2P platforms and hence the government is not held liable for any mishap as they don’t provide any form of insurance or security.
Despite all these looming disadvantages, Peer-to-peer lending has recorded a high percentage increase in recent times.
Unlike initially where even investors lost their money due to high default rates. Investors now see it as a calculated risk on their part these days.
About the Author
Chibuzor Elizabeth Chijioke a graduate of Abia State University is a Nigerian-based entrepreneur and content writer. She trained as a digital marketer at Innovation Growth Hub. She is committed to teaching people how to apply technology to better their lives and businesses. She spends her leisure reading sci-fi and fantasy novels.
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