Whatever Happened to Peer-to-Peer Lending? – Kiplinger’s Personal Finance

Even before Uber upended the taxi business and Airbnb disrupted vacation rentals, the idea of peer-to-peer lending was meant to give individuals alternatives to traditional consumer sources of credit, both as borrowers and investors. But the fintech market is continuously evolving. We’ll catch you up on what’s happened to the concept, and how (and whether) you can invest or borrow from a digital lender.

Most of the firms that started out as online platforms to connect consumers who wanted to borrow money with individual investors who financed loans, also known as peer-to-peer lending, now primarily partner with larger financing sources, like banks and hedge funds, using their artificial intelligence tools to evaluate creditworthiness. Other players have exited the business or had regulatory problems. As the business model continues to grow, it’s also being called marketplace lending or fintech lending.

These days, individual investor funding of digital loans has been dwarfed in the marketplace by larger sources of funds, according to Nimayi Dixit, fintech analyst for S&P Global Market Intelligence.

Still, opportunities for individual investors to fund peer-to-peer lending remain, although as with any investment, you’ll need to do your due diligence. Likewise, borrowers should shop around to determine where they can get the best terms, whether from a fintech platform or elsewhere.

How Fintech Loans Work

Dixit defined digital lenders in a report as “nonbank lenders that offer loans to consumers or businesses through digital channels. These lenders have unique funding models with liquidity provided by investors, credit facilities, securitizations or balance sheet cash.”

According to the U.S. Government Accountability Office, most fintech lenders now use a model in which loans originate through bank partnerships that enable the lenders to operate through bank charters rather than state lending licenses. This enables them to charge uniform interest rates nationwide and avoid state lending limits.

Then the fintech lenders purchase these loans from the banks and sell them to investors or keep them. A small number of fintech lenders originate loans directly and have lending licenses from multiple states. Dixit said not much lending is truly peer-to-peer anymore, meaning individual investors are just a small part of fintech lending.

To give an example, one prominent fintech lender, Prosper, funds about 91% of its loans through what is called its “whole loan channel,” or retail sources of funding, while less than 10% of the funds are from what they call the “notes channel,” Dixit noted. In 2020, the company may have had about $1.5 billion in loans, of which $1.4 billion was funded through the whole loan channel, he said. Peer-to-peer lending “is not a growing segment,” Dixit said, “at least not …….

Source: https://www.kiplinger.com/personal-finance/credit-debt/604311/whatever-happened-to-peer-to-peer-lending

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