Understanding the features of any financial tool is important as it will help you to understand and appreciate that tool. But sometimes it can be difficult to find the required information to fully understand the characteristics of any given investment space, and that is something that we are aware of. That is why in this article today, we are going to provide you with the characteristics of the new investment option known as crowdlending.
Crowdlending (also known as Peer to peer lending) does not fit perfectly into any of the other types of traditional financial institutions namely deposit takers, insurers, and investors. For this reason, P2P lending is sometimes referred to as an alternative financial service.
During the early stage of crowdlending, many people categorized it by disintermediation and reliance on social networks. However, these features have gradually disappeared. But while it is still true that the introduction of the internet and e-commerce makes it easier to draw away from the traditional financial intermediaries, and that consumers may be less likely to default to the lenders with whom they have formed a community, the rise of the new intermediaries has turned out to be cost and time-saving. Outspreading crowdsourcing to unfamiliar borrowers and lenders opens up new opportunities.
Most crowdlending intermediaries offer the following services:
- Creation of credit models for pricing and loan approvals
- Online investment sites to allow borrowers to attract investors and lenders to identify and purchase loans that fall within their investment criteria
- Verify the identity of borrowers, bank account, income, and employment
- Legal compliance and reporting
- Performing credit checks on borrowers and weed out the unqualified borrowers
- Processing payments from borrowers and transferring those payments to lenders
- Servicing loans, offering customer service to borrowers and collecting payments from borrowers who are in default or delinquent
- Finding new lenders and borrowers
There is a myth that crowdlending borrowers are all on the subprime level. However, this was disproved by a report by Prime Meridian Capital Management, as it was found that not all borrowers are allowed to join a Peer to peer lending platform.
Some of the characteristics of P2P lending include the following:
- It can sometimes be conducted for profit
- No need for a common bond or prior interaction between the borrowers and lenders for the transaction to happen
- Everything takes place online
- P2P lending platforms act as the intermediary between lenders and borrowers
- Lenders are allowed to choose which borrowers to invest in, which is a feature offered in some P2P sites.
- Loans are securities that can be transferred from one party to another, either for profit or debt collection, although not all crowdlending platforms offer transfer facilities or free pricing options, thus costs can be as high as tens of percent of the total amount sold, or sometimes zero percent.
- Loans can be secured or unsecured and are usually not protected by government insurance.
The above are the characteristics of the P2P lending business model; however, the platforms themselves also have characteristics that allow them to facilitate their functions.
Below are some of the characteristics of P2P software:
- Borrower and lender platform
- Full loan management and administration
- Multiple loan facility
- Arrears management
- Multiple sub-loan facilities
- Paperless office module
- Commission and payment systems
- Advanced reporting system
- Quick reports
- Dashboard reports
- Graphical reports
- Excel reports
- Advanced excel reports such as graphical charts, formulae
- Diary and workflow
- Enhanced security measures
- Real-time online quote systems
- Tailored modules
- Email alerts system
- Modular based solutions
Peer to peer lending is now the major aspect of consumer credit access, especially after most of the banks eased on consumer lending after the implementation of Dodd-Frank and the global financial crisis.
The European market was the pioneer of crowdlending, and companies such as Mintos and Grupeer have developed their platforms to take advantage of the unfulfilled need, and therefore creating a fast-growing niche in personal finance. Fast Invest, Crowdestate, Crowdestor, and Bulkestate are just a few of the notable players in the European market.