Perhaps the simplest and most accurate definition of peer-to-peer lending is from Prosper.com, a leading peer to peer lending website.
We connect people who want to invest money with people who want to borrow money.
Peer to peer, or P2P, lending has grown significantly in the last five years. Prior to the credit crisis, which came to a head in 2008 and led to the great recession, the credit market had gone awry. The ability of certain institutions to bundle sub prime lending and sell it off allowed for a bubble in housing and credit because initiators of credit weren’t held responsible for bad loan decisions. Pre-approved credit cards and mortgages were given to folks without proving an income was typical in lending institutions.
Now, the pendulum has swung in favor of tight, hard to find lending opportunities. Banks also earn returns by essentially borrowing from the Federal Reserve for free and buying risk free Treasuries; virtually eliminating any incentive to be competitive in making consumer loans.
The P2P Lending Opportunity
Currently P2P lending makes up just under $3 billion of the $850 billion available market in consumer credit. This is expected to explode higher in the coming years.
Internet technology allows for a more efficient aggregation of consumer loan portfolios at low cost in the P2P lending space. The technology infrastructure significantly reduces operating costs of what a commercial bank faces, which produces a much stronger value proposition.
Federal Reserve data indicates banks have earned a 10.8% annual lending spread on consumer credit from 1985 to 2012. That represents a great opportunity to create greater efficiency in both lending and investment.
A traditional bank typically offers higher credit costs often with hidden fees, provided credit is even available. Banks have brick and mortar costs that the P2P lending space avoids. That added efficiency allows more competitive access to credit with better and more transparent terms.
While P2P lending is more efficient due to disintermediating large banks that hold 90% of consumer loans, that doesn’t mean that it is a wild frontier of borrowing.
The investing activity of Prosper, and Lending Club (the two largest P2P lenders) is fully regulated with the Securities and Exchange Commission. Prosper issues note securities and makes public filings with the SEC. It is also required to register in individual states. P2P lending complies with Federal and state consumer lending laws.
Bourgeoning Electronic Distribution Channels
In short, P2P lending takes advantage of more efficient electronic distribution channels, reduced cost due to bank disintermediation, is fully regulated and the interests of lenders and borrowers are better aligned than traditional lending choices.
The bottom line value proposition of P2P lending is that it provides higher returns for lenders and lower rates for borrowers
The Prime Meridian Income Fund, A New Avenue for Peer-to-Peer Lending
Prime Meridian offers a convenient and efficient vehicle to take advantage of the P2P lending space by providing the opportunity for investors to participate in the rapidly expanding market of peer-to-peer lending.
Accredited Investors can contact Prime Meridian to learn more.