Myths and misconceptions about P2P lending

The world of marketplace lending, or peer-to-peer (P2P) lending is still relatively young. At just over a decade old, there is still a lot of confusion surrounding how this democratization of finance works. In this post we look at common myths and misconceptions about this newest form of borrowing and lending.

P2P lending is an unregulated “Free for All”

Like the early days of music file sharing, many people believe that marketplace lending is free to operate without the restriction of law. This misconception likely stems from the fact that loans are originated by the people or companies without any actual control, unlike banks which are subject to regulations. The truth, however, is that all marketplace lenders have a partnering bank. This bank is subject to all the same rules and parameters of a conventional banking institution. In fact, we’ve written about how regulation influences marketplace lending previously on the blog.

P2P lending is dangerous because you don’t know who you’re lending to

The anonymity of the web has led many to believe that lenders are handing their money over to a void without ever understanding what’s within. This is untrue. Nearly all marketplace lenders offer accessible analytics (some more than others) that give dimension to the person or people borrowing from any given lender. On Bondora, lenders can research granular-level data concerning the income, work history and debt ratios of borrowers.

Measuring risk adequately in P2P lending is impossible

Some think that a lender can never truly understand risk. However, as P2P lending has matured analytics have improved. All major lenders offer loan rankings that allow investors to quickly assess the risk of a loan. If a user wants to go deeper, they can often pull aggregate data from the site to determine default rates across all lenders. Meanwhile, third party sites like Orchard and dv01 have emerged as resources for providing independent data on rates of return.

P2P lending and traditional banks are at war

While some banking institutions are feeling competitive pressure from P2P firms, the two entities are finding ways to work together. Banks want updated methods for reaching a younger and wider demographic. Marketplace lenders in various forms can help provide this inflow. At the same time, marketplace lenders can benefit from the deeper reserve of capital available at banks that have had a longer history.