The Four Prime Segments of P2P Lending: An Analysis
While there are many reasons borrowers apply for P2P loans, four core segments of P2P lending have emerged: consumer credit, small business, student loans, and real estate.
There are overlaps in each segment and by each P2P loan platform targeting these borrowers and lenders, however each platform has a distinct audience and target market. Let’s take a brief look at each segments of P2P lending.
P2P Consumer Credit
Consumer loans are the most popular segment in the peer-to-peer lending space. Credit card and debt consolidation, medical expenses, weddings, and home repair are some of the most common types of P2P loans requested. Leading P2P lending platforms in the US consist of Lending Club and Prosper, and Zopa overseas.
This type of loan is one of the fastest growing segments and makes up the majority of P2P loans due in part to the fact that they are generally smaller sized loans, have a relatively high number of borrowers with good credit scores, and the speed of which an individual can complete an online application and have a loan funded (usually in a few days.)
P2P Small Business Loans
For small business owners looking to obtain a loan, it can be a difficult and frustrating process. Traditionally, entrepreneurs went through banks to get the funds needed to grow their business. However, in the past six years, it’s increasingly difficult to get a loan through a bank. Loans of under $500K are not profitable for most banks with their huge overhead, regulatory burden and cost structure. Recently, P2P small business loans have become an attractive alternative.
Now businesses can borrow directly from a wide range of investors. Utilizing platforms like OnDeck and Funding Circle, established businesses can get a loan within a week. Bear in mind there are many types of small businesses out there and many different loan types. Investors should pay close attention to the types of businesses they are investing in, and whether it is a collateralized loan and if it’s backed by a creditworthy personal guarantee or not.
P2P Student Loans
Student loans currently account for the second largest amount of debt in the United States. Two main P2P lending platforms that have emerged to specialize in student loans are CommondBond and SoFi. They are offering two different options for students: One can either obtain a student loan consolidation loan after graduation or be able to quality for a traditional student loan if in a qualifying graduate program.
For investors, investing in student loans is very similar to investing in others areas of p2p lending however, yields tend to be lower on average.
P2P Real Estate
Real Estate loans take the number one spot, accounting for the largest amount of debt in the United States. Long dominated by big banks, P2P platforms like Realty Mogul, Patch of Land, and now SoFi are disrupting the market for these types of originations.
With minimal paperwork and a quick turnaround, many borrowers looking to take out a mortgage are seeing peer-to-peer lending as an attractive alternative to the hassle that goes along with big banks. Younger individuals, who may not have the same loyalty to banks as their parents have, are open to many alternatives when making major financial decisions such as buying a home.
In addition to mortgages, there are other types of real estate loans which tend to be more popular for investors which include construction loans, bridge loans, and first trust deeds. These types of loans tend to have much shorter duration and at higher yields.
“We’ve identified consumer credit and small business loans as the segments with the largest potential for immediate growth in P2P lending,” says Don Davis, managing director of Prime Meridian Capital Management, a fund specializing in the P2P lending space. “The Prime Meridian Income Fund and Prime Meridian Small Business Lending Fund were launched to provide institutional and qualified individuals a way to capitalize on the potential opportunities in P2P lending. As the other segments of P2P lending emerge, we’ll be well positioned to utilize our technology and experience to capitalize on those trends.”
What is the next segment for P2P lending growth?
Whether P2P funded student loans and real estate loans grow to the size of the consumer credit and small business segments remains to be seen. However the key to any new segment emerging in P2P lending is likely to have similar characteristics to consumer and small business lending, these being: a large market, apathy from banks and other major lending institutions, and interest rates high enough to generate attractive returns to investors.
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