Peer to Peer Lending (or P2P as it is more commonly known) is the process of connecting people who want to invest money (Lenders) with people who have a need and are looking to borrow money (Borrowers). The process is achieved by leveraging cutting-edge technology and efficient processes to deliver a superior experience to both Lenders and Borrowers. Carilend delivers this experience along with a robust level of screening, which includes identity checks, credit scoring and other assessments.
By connecting Lenders directly with Borrowers and keeping costs low via the use of technology, the investment returns are higher with Peer to Peer Lending as the savings are passed onto Lenders. A Lender's risk is mitigated to an extent by the process of spreading (or diversifying) the Lender's money across many small loans to many people as opposed to one loan/Borrower. At Carilend, we suggest that typically the Lender makes a minimum of 100 loans. This way a Lender who wants to invest BDS$10,000.00 would be lending $100.00 to 100 different Borrowers. Many Lender contributions are then matched together to fund one loan to the Borrower.
Since the introduction of P2P in the UK circa 2005, the industry has grown significantly around the world. The company that started P2P, Zopa, passed £2.8 billion in unsecured, consumer lending in October 2017. Naturally, with anything new, there are always misconceptions, and this article sets out to dispel some of the myths about P2P.
Similar to any other new products or services, many myths exist about P2P Lending. Here at Carilend, we are committed to providing information as part of an education process to dispel the myths and increase overall knowledge.
“You need a lot of money to start.”
In the case of some investments, there is a very high entry point threshold, which can make the investment prohibitive for many people. However, this is not the case when investing through Carilend. The smallest amount that you can lend to any one Borrower is BDS$25, and for a well-diversified portfolio, it is best practice to have at least 100 loans. Therefore, a well-diversified minimum investment of BDS$2500 is recommended.
“P2P lending is unprotected.”
All investments involve risk, and even deposits in the bank are only guaranteed up to the amount of any deposit protection scheme mandated by law. For example in Barbados, this limit is $25,000. While Peer to Peer investments are not protected by this scheme, there are many protections in place to help mitigate the risks involved.
The main risk associated with P2P is the risk that Borrowers don’t pay, but there are many steps to mitigate this risk. First, we only approve loans for creditworthy applicants, and all applications are subjected to rigorous scrutiny, as described in other posts on this blog. Second, Lender funds are diversified among many loans/Borrowers. Third, Borrowers are required to pay into a Reserve Fund, which is to help protect Lenders’ investments. If a Borrower defaults, Lenders will be paid out of the Reserve Fund until the Borrower brings the loan up to date. While loans are not guaranteed by the Fund, it will help minimize the impact of loans that default. As with all investments, your capital is at risk. But by building up and monitoring this Fund, we will help protect as many loans as possible.
“P2P Lending is for tech-savvy people.”
Indeed, you need a computer, tablet or smartphone to transact P2P Lending business whether you are a Lender or Borrower. However, the process is very straightforward and simple, and we have gone to great lengths to ensure that in a few short clicks access is available to all.
“Money invested is locked in for a fixed period.”
P2P Lending funds are invested in fixed loan periods, and you should commit to a period that you know your funds can be tied up for. However, we recognise emergencies do exist and indeed plans can change. Therefore, it is possible to withdraw funds before the loans mature, provided that there are other investors willing to take your place in loans you wish to “sell” to get your money back. This happens automatically through the system and without any manual intervention so long as there are new Lender monies available to take your place. There will be a small fee (1% of the amount withdrawn) for early redemption, similar to what occurs if you break a fixed deposit before full term.
“Value of the investment goes up and down.”
This is an accurate statement with some investments, but it is not the case with P2P. This is because P2P loans are done at a fixed interest rate, and therefore, provide a steady predictable income stream from the repayment of the loans. Furthermore, changes in financial markets do not impact the value of the investment, making P2P lending a predictable investment vehicle.
Similar to any other new products or services, many myths exist about P2P Lending. Here at Carilend, we are committed to providing information as part of an education process to dispel the myths and increase overall knowledge. We also invite you to do your own research on P2P Lending to ensure you have as much information as you desire. If you are ready to take the next step with Carilend, you can click here to register.