P2P Lending: A Different Method of Capital Distribution
In traditional banking, people with spare cash invest them with banks (amongst others). In consideration for these funds, banks pay investors interests for the deposited sums. The interest rate on savings accounts today is approximately 0.5% p.a. or less.
Funded by these deposits, banks dish out loans to borrowers. The difference between the loan and deposit rate is the “spread” or profit that the bank earns. Current unsecured term loans for small businesses in Singapore range from 10-20% p.a. effectively. In trader’s speak, bid = 0.5% / offer = 10-20%, a highly lucrative spread indeed!
Ok! It’s a simplification but that’s generally the gist of the traditional banking model.
Peer to peer lending presents an alternative method of distributing capital. Essentially, it’s about going direct, disinter-mediating or cutting out the middle-man. So, instead of placing funds with the bank, people with spare cash lend directly to borrowers, and the rates are set on potentially better negotiated terms for all parties.
With no middle-man to reserve their profits, investors retain a larger share of returns. And borrowers are no longer beholden to the high mark-ups these middle-men demand for gathering funds from investors.
In P2P lending, borrowers and lenders connect and reach their respective zones of possible agreements. The result, a WIN-WIN for all.