Debunking 5 Myths About Peer-to-peer Lending
14 December 2015 | Comments
Myths naturally invade all walks of life and investment is no exception. We’ve picked up and debunked some common myths about peer-to-peer lending. Here are our top-five:
1. «You need a lot of money to get started»
«It takes money to make money». It’s a phrase that unfortunately stops people from investing before they even start. On the one hand, some types of investments require a lot of money to get started. On the other hand, peer-to-peer lending is accessible – 500 € is all that it takes to open an account on Viventor. It’s possible to invest as little as 10 € per loan to ensure diversification of a portfolio.
2. «Peer-to-peer lending is not a mainstream investment»
There is nothing new about the business model of peer-to-peer lending. It’s connecting investors directly with borrowers who want a loan avoiding the additional costs of bank and brokerage. It allows both borrowers and investors to save money that would have been otherwise spent on commissions and fees for other parties’ services.
Lately, the P2P lending industry is moving mainstream and seeing significant growth, especially in developed countries with strong financial markets. P2P lenders in Europe generated over €8 billion in loans in with annualized year to date growth 103%.
3. «Peer-to-peer lending is not regulated»
A commonly held misconception is that peer-to-peer lending is not regulated. The regulatory landscape of the European alternative finance market is fluid and multifaceted. In some countries, existing regulations have been “extended” for peer-to-peer lending (for example, Estonia and payday lending regulation). In other countries, new regulations have put strong boundaries around the industry.
From April 2014 Peer-to-peer lending industry in the UK is regulated by the Financial Conduct Authority (FCA). The regulation obliges peer-to-peer lenders to have minimum operating capital requirements, meet client money requirements and act with integrity, skill, care and diligence and to treat customers fairly.
4. «There is no difference between peer-to-peer lending and crowdfunding»
Crowdfunding, like peer-to-peer lending, is at the frontline of innovation in finance. A fair share of people considers both to be almost the same thing.
And even though certain principles are indeed the same, there are also quite a few differences between the two concepts.
Crowdfunding can be defined as pooling resources from multiple individuals to gather financing for a particular project. It can be and is used for various types of projects, and is also divided into four sub-categories: Rewards-based crowdfunding, Equity crowdfunding, Charity crowdfunding and Debt crowdfunding. In the meantime, peer-to-peer financing is a comparatively fresh alternative to the banking model of financing as we know it, and is mostly used only in the sector of financial services.
Like crowdfunding, peer-to-peer financing also mainly consists of the borrower and the investor side, and a person asking “Isn’t Debt crowdfunding and peer-to-peer lending the same thing?” would make a fair point. But – unlike crowdfunding, peer-to-peer financing is not always about pooling resources. A fair share of marketplace lending companies offers their investors to purchase stakes in already originated and pre-funded loans. This, obviously, gives greater opportunities for diversification, as well as facing lower risk for the investors, since the loan originators have already conducted screening and expressed their trust in borrowers by financing them.
5. «Peer-to-peer lending is not protected»
Not all peer-to-peer businesses are the same. In Viventor all loans are 100% pre-funded, secured by real estate mortgages, and come with 60 day Buyback Guarantee. To ensure high-level protection of our investors, we do not offer investments in loans with high levels of risk. The loan originators keep a stake in all the loans issued and go to extreme lengths to avoid borrower default. Should it still happen, we are in the same boat with our investors, just as willing to resolve the situation by enforcing debt collection, or buying back non-performing investments.
To find out more about Viventor, visit the platform here!