Growth of Online Lending Marketplace; Pros & Cons
The growth of online lending started in early 2000; it was supported by strict banking regulations and global financial crisis. It is a fact that both lenders and borrowers can be benefited in an online lending industry if it is implemented in right way. There are a lot of models and ways that can be used in online lending. Today we will discuss what are the opportunities and challenges we have for online money lending.
Online lending companies use Machine learning and Data Analysis of individual credit history to decide whom to give loans. Both publicly traded and private lending companies like Lending Club and Prosper are the famous online lending services. These online lending companies function as intermediaries for loans to customers and businesses. They offer investors a chance to fund the loans, which are usually in the range of $2,000 to $35,000.
The market value for this industry is growing very fast and doubled each year since 2009. It reached about $19 billion in 2016 and exceeded $22 billion for the first half of 2017.
Describing themselves as “eBay for money”, these marketplace lending platforms were designed to bring borrowers in need of loans – $1,000 as the minimum, $35,000 as the maximum for unsecured consumer loans, and up to several hundred thousand for secured products – together with investors seeking better returns than they’d get from a bank. Source
Advantages of Online Lending:
Both individuals and institutions can lend from the online marketplace. Investors can invest in different people with as little as $25 in a portfolio of hundreds of loans. Borrowers can repay monthly installments both principle and little interest. Investors can choose in which category they want to invest and reinvest the payments they receive from previous loans.
Cons of Online Lending:
Involves risk of principal loss: If you jump to invest in only the high-risk-category loans with interest rates, you may easily lose all your money. "Do not chase high returns without understanding the danger that accompanies it". "Investors can invest as little as $10 in each loan, but they still need about $3,750 to spend in enough loans so that a few defaults do not wreck your overall return."
Diversify the Investment: To maximize your investment, diversify by investing in the number of loans in risk classes. It is recommended a portfolio with of loans in different category and need to identify the capabilities of borrower
High Interest: Credit scores below the cutoffs are not typically approved. Charges for debtors at the end of the scale is going to probably be 20 to 30 percent. That is not much better and may be worse than the interest rates on credit cards for individuals with bad credit.
I was also considering lending, but actually I am still afraid - read to much bad stories... Should I try it???
thank you for this information, i also add that Capital markets function the same way as manufacturing or any other industry. The pros and cons of a 5-year contract vs a yearly contract are the same.
The difference between a captive fund and an independent fund is similar to a manufacturer controlling its distributor or not.
As an investor, perhaps the question you want to ask yourself is: would you rather be married in a 5-year contract you cannot break or would you rather be dating and re-evaluate your relationship any time you wish?
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Waooooooo very interesting and informative post. Really amazing.