P2P lending is the popular type of crowd funding, whereby an internet platform collects small amounts of funds from individuals in a crowd to finance collectively a larger loan to individuals or businesses. Websites that facilitate peer-to-peer lending have greatly increased its adoption as an alternative method of financing.P2P lending is also known as social lending and has only existed since 2005.
Risks associated with P2P lending
- Lack of legal disclosure of risks for lenders: There are no legally defined disclosure standards to ensure that lenders have a clear and accurate understanding of the risks associated with using a specific P2P platform.
- No uniform standards to calculate profit returns: The methods used for calculating the risk-adjusted net returns differ considerably from platform to platform because national laws and regulators have yet to define a common standard for measuring the performance of P2P-loan investments.
- Lack of disclosure about platforms and borrowers: There are no disclosure standards for information about borrowers or platforms’ credit assessment methods. This makes it impossible for investors to assess and compare the quality of platforms and so make a careful selection of the “right” platform.
- Lack of transparency regarding credit assessment: There is lack of transparency about how platforms assess credit. Borrowers may not know what kind of data their platforms are using and how credit ratings are calculated.
- Lack of central regulation: Often platforms in countries without dedicated crowdfunding regulation do not need any central authorisation from the national financial regulator to start their business and do not have to fulfil minimum capital requirements