There’s certainly some cause for concern. Consider these facts: P2P loan volume is poised to hit $77 billion this year, a 15-fold increase from just three years ago. Lending Club, the No. 1 player worldwide, is trading at a market value of about $7 billion even though it lost $33 million last year. And in a flashback to the subprime mortgage boom, P2P startups have begun bundling and selling off loans through securitizations.
The business of matching lenders with borrowers online—which still amounts to only 0.08 percent of the $96 trillion in global corporate and household outstanding debt—may truly be an innovative way to distribute capital. But is P2P a revolution or just another bubble?
Money managers are betting it’s the former as they pile into one of the fastest-growing asset classes in finance...
Prosper Marketplace makes investing too easy. Learn more now...
♦ The Lending Mag sees the feeble attempts to compare the growth of peer-to-peer lending to the disastrous mortgage market of the 2000s as mere fear-mongering promoted by a subsection of institutional bankers and those without a true understanding of the p2p lending model. Peer-to-peer lenders are far more transparent than the banks ever were during the mortgage crash. Many p2p lending companies in the US and UK post their loan books online so that their investors can clearly see where the money is coming from and where it is going.
The peer-to-peer model simply works, it's easy to be transparent when there is nothing to hide. In fact, with their transparency they have everything to gain. How transparent were the banks during the mortgage crash? Exactly.
♦ Just because p2p loans are making lending available to more people doesn't mean they are being handed out like free candy. Peer-to-peer lenders are known to be very selective about who can receive p2p loans. Take the UK peer-to-peer lender Zopa for example, they approve only 1 out of 5 loan applicants and both they and their competitor Ratesetter have loan default rates lower than one percent. American p2p lenders Prosper Marketplace and Lending Club both boast loan default rates less than 3%.
♦ A word of caution though, it is necessary to keep an eye on what the peer-to-peer lenders do in the future as the lending market becomes more saturated and new p2p lenders spring up. As competition grows, some lenders may be enticed to lower credit criteria requirements and take on borrowers with bad credit. In fact, it's likely to happen as different business models spring up under the p2p lending umbrella. Even so, that doesn't mean that the major companies or even the majority of lenders will follow suit, but it's something to be mindful of.
Related Article: How to get an unsecured home improvement loan