Fundamentals 101 – P2P Lending
Peer-to-peer lending (more commonly known as P2P lending) has picked up a lot of interest in the personal finance communities the past few years, but what is P2P lending and how do you take advantage of P2P lending in Malaysia? Read the rest of this article to find out.
What is a P2P Lending
Like a bond, the easiest way to think of P2P lending is to lend some entity money in return for interest and to get the money back in the future.
In fact, P2P lending is really just a bond, but given a fancier name.
When we talked about bonds, we said that the most common types of bonds are government and corporate. However, when we mentioned corporate, we are talking about the bigger companies. We are not talking about the mamak down the street, or the start-up that your friend is working on.
The main purpose of P2P lending is to take over the roll that a bank might have used to play. Instead of these smaller companies going to a bank, who might be stricter with their requirements, or charge a much higher interest for lending money, these companies can try to borrow money from the general public by working with a P2P company.
The P2P company would do some basic due diligence (ie/ is this company real, do they really have a reason to want money, or are they hoping to get the money and then disappear and never pay it back).
Once the P2P company has verified and approved the company's application (and give the company an interest rate), people can then buy into these loans until the company reaches the amount they were hoping to raise for the loan.
From there, the company would pay back a small part of the loan along with interest over an agreed period of time.
What should you do with this information
P2P companies like to advertise 10%+ in returns, and in many cases, their customers have made 10%+ by lending these companies money.
However, we would suggest you be cautious when investing in P2P programs. The reason is because P2P is relatively new and in many cases, the companies that are borrowing the money have not gone through a scenario where suddenly no one wants to buy their product because they have lost their job (I'm referring to a recession).
It's really easy to talk about 10%+ when everything is going great (even the stock market has been giving returns 10%+ for most years since the recession in 2009), but once the next recession hits, who knows what will happen.