Sample Essay On Peer –to- Peer Lending

Abstract

Crowdfunding is an approach to raising capital from side to side collective efforts of customers, investors, family, and friends. The approach is the aim at tapping collective efforts of a large pool of individuals primarily through crowding platforms and social media. A little bit of the history of crowd funding is thought to have occurred In 1997.At this time, the rock band Marillion were unable to afford a tour so that they can release an album. The American fans used the fledging internet to raise $ 60,000 so that the band could pay it in the US. However the group was not involved in the first round of raising the funds, they have since used the method to finance their production successfully. Moreover, February 2012 the first crowdfunding project had grown over £ 1,000,000.The fascinating future about crowd funding is that it is virtually opposite to the mainstream approach to business finance. Traditionally if one had to raise money to start a business one would pack up the business plan, do market research and trial products then shop the idea to wealthy institutions. The funding sources include banks and angel investors among other which limited ones option to many players. The paper addresses one kind of crowdfunding that enables individuals to borrow and lend money without the use of the intermediary. The method is called peer-to –peer lending. There are several methods addressed; others range from technology, and the challenges faced starting up strategies discussed.

Peer-to- peer method removes the middleman from the process of lending money. However, it involves more time endeavor and risk than the broad-spectrum of brick and mortar lending situations. The method is also called the social lending. The advantage to lenders is that the loans generate income in the form of interest .the interest often exceeds the amount earned by traditional means. In addition, the peer-to-peer lending also abbreviated as P2P loans, gives the borrower’s access to financing that they at the time not have or else gotten endorsement by the typical monetary mediators. In order to recompense lenders for the hazard, they are taking in such a cases the amount charged on peer to peer loans may be higher than the prime loans.

Peer –To- Peer and Traditional Market, Technological Advances in IT and Digital Economy

In relation to the traditional market, there is an argument that peer to peer lending misleads the lenders in a honeymoon period that might end when they have grown big. The peer to peer lenders may require a benevolent regulatory environment in order to thrive. There is an evident however that the P2P companies will continue to enjoy a supportive regulatory regime especially in UK. For instance in April 2014, there was an announcement by the financial conduct authority of the new prudential monetary standards for the crowdfunding industry. The norms which are capital based has done little to diminish the relative strength of the customer value proposition of the peer to peer lending versus that of high street banks. Some senior officers of various banks, however, have continued publicly to acclaim P2P lending as a means of promoting effective competition in the interest of customers. In addition, it boosts the heftiness of the fiscal systems by adding to its diversity. There seem to be good reason to believe in the peer to peer lending in particular loan businesses.
Peer to peer lending as a digital platform for rising and lending money underlies competitive thrusts that may not be new but uses for a new effect. Staggering amount of information is accessible as by no means before. Analytic and processing capabilities have made similar leaps with algorithmic scattering intelligence across digital networks. The technologies available have made the P2P near –perfect transparency, making it easy to lend loans. Furthermore, the digital business has reduced the transaction and labor costs. As P2P lending puts it, success largely depends on marketing vigor, it has no complication. For this reason, the P2P lending platforms are scrambling to develop apps for smartphones and tablets, a quality of algorithms used to screen the borrowers and ease the utilization of the platform. P2P may also attract the internet companies and banks which already have a lot of data that and can connect them. For instance Google in the previous years have led an investment of $ 125 in lending club, this means that it might do more well.

Challenge in the Peer-To-Peer Lending Sector and Solution

There are several key challenges that arise with peer-to-peer lending. To start with is the big worry that an ill-run platform might collapse, hence taking the investors money with it. There is much worry that the industry is rattling confidence. The p2p businesses protect the un lent funds gathered from savers and arranged for third parties to manage outstanding loan in case the stop trading. Another significant problem is that of one's insurance. The state does not cover the fund placed by the peer to peer lenders backed assurances that defend retail deposit in banks. Traditionalist that such arrangements may create the moral hazard that has affliction on conventional banking.p2p lending should have much as possible try to end the dangerous mismatch between short-term deposits and the long-term loans inherent in traditional business. Locking lenders would not help as it is for the loan’s duration. On the other a secondary p2p market is developing, this is to allow the lenders get the money back if they need it. It is achieved by selling the loan at a discount. However, the rules might vary as some platforms may allow the buying back of the loans and others may hold an auction.

Risk Diversification Method for Peer –To- Peer Lending

The risk associated with peer to peer lending includes the default rates. In many p2p, for example, the lending club, the loan ranking is ‘A’ through ‘G’ in order to approximate the risk of default. The default rate of the consumer usually increases with age even for those who have higher credit. The p2p highlights the risks of borrowers are failing to repay the loans. The argument is that people with colossal number of notes diversify away the risk of having one bad note impact their overall portfolio. If the loan is going to default it would have no guarantee but it somehow takes care of the concern over the aging of the loan. There is some restriction that Securities and Exchange Commission requires so as to regulate the industry because the loan is unsecured and insecure. Therefore, most p2ps are jurisdiction specific to comply with the international anti-money laundering laws. In addition, there is some limitation on investors lending, this no more than75%.howvwer for qualified borrower risks is minimal. To curb this agency may try to collect the debt, and secondly there is a chance that the loan gets funded if investors are interested in that particular risk.

Peer -To -Peer Growth Strategy

Reports published by finance association for peer to peer reveal that the growth of lending has grown in the past few years. For instance, at the end of the first quarter in 2014 cumulative lending hit 1207 billion pounds. It is a substantial increase compared to 2013 which was 491 billion pounds. Businesses in UK have primarily benefitted from over half a billion funds and consumer peer to peer lending. The latter growth strategy is to allow a tax-free within the individual savings accounts for the first time. It means that in future consumer could invest up to 15000 pounds through the peer to peer platform without any tax payment on any gains. The growth strategy hoping to receive well is a testament to the shift of peer to peer retaining its position in the lending market globally. The alternative growth strategy as it tends to put the business forward there will also e flexibility to manage the entire plan functionally and the reconciliation required for the challenges posted to p2p in funding sector.

Rise of Peer-To - Peer Lending Platforms

The peer to peer lending and other smaller companies inhabit the long tail distribution. The p2p can perform collaboratively and produce open source software. The demand side factor that lead to long tail amplifies by a network of services created by the hyperlinked recommendation across the services. The Laffer curve on peer to peer lending suggest that as taxes increases from low level, tax that are collected by the government also increases. When people lose their jobs, for instance, the curve for credit default rate against the unemployment rate for 1991-2014 shows that there will be a default. The rise of lending club is a beautiful example as the founders announced taking the business to a new level. There are strategies for making the company growth and venturing into student loan.
Peer to peer lending can be a great method for investors to diversify the portfolios and access high return in the current market. However understanding the nature the nature and the risk undertaken is important. Peer to peer lending can provide a credit option for qualified borrowers. Therefore the borrower should, on the other hand, compare and annualize rates and other fees to ensure that they are getting a good deal. Peer to peer is a very young industry, and it has to proof its stay. However, players like the lending club and other players on the market have to be for the banks, at least when it comes to loans.