A Better Alternative? A Look at Peer-to-Peer Lending
Peer-to-peer lending systems “cut out the middleman,” according to The Wall Street Journal. By using online lending platforms, borrowers can get in front of a wide range of investors. In the case of sites like Lending Club, lenders can put small amounts of money toward a given loan, minimizing their chance of losses on risky borrowers.
Where traditional loans can take several weeks to process, alternative lenders often deliver funds within a few business days. The application can usually be completed online in a few minutes, which is more in line with what millennials expect from the companies with which they work.
Many peer-to-peer systems target millennials in particular and help them build their credit by looking at more than their financial histories. New underwriting assessment systems look at education and other life circumstances to determine whether or not someone is a trustworthy borrower. For someone who’s made a financial misstep or who doesn’t have much credit history on which to draw, this is a game-changer.
Alternative loans have become particularly popular among young people who want to pay off high interest credit cards. This can save them thousands of dollars in the long-term, and it allows them to build positive credit history by paying off the new loan in a fixed period of time. It’s also attractive for less traditional financing needs, such as certain medical treatments, travel, or personal projects.
So what are the risks? The International Business Times cautioned that the relatively unregulated industry could be due for a bust even as it gains momentum. Peer-to-peer lenders have loaned massive amounts of money (Lending Club investors alone have made more than $11 billion in loans), but the IB Times noted that because these loans aren’t backed by the FDIC, the bottom could fall out if many borrowers default. That possibility could ultimately translate to less accommodating terms for high-risk borrowers.
Many of the key concerns about alternative lending stem from worries about the larger industry. Portfolio manager Matt Shibata cited declining lending rates and increased refinancing requests as particular risks. Shibata also expressed concerns about vetting systems not being rigorous enough and business lenders exploiting borrowers.
Because alternative lending is still so new, long-term concerns remain to be same. But it’s clear that this industry has opened up financing options for millions of young people looking to buy homes, start families, or build their lives on their own terms. Millennials shouldn’t eschew banking institutions entirely, especially as they release new products targeted to our demographic. But traditional lenders no longer have the last word in financing, and alternative platforms will continue to create new opportunities in this space.
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