International bankers call it peer-to-peer lending; business publications term it person-to-person lending; some name it as P2P investing. To Malaysians, it is known as Ah-Longs.
We see it everywhere around us – light poles, telephone booths, trees and pedestrian bridges – at least our version of it. “Blacklisted by banks? No problem!”… “No collateral required.”… and my favourite of all time: “Easy, quick and no tricks!”
Before I rumble on about our version of this growing trend, let us go back to the global scene. Peer-to-peer lending has been in existence for as long as time, although it did not have such a catchy sounding name back then. Whether it was a loan from a schoolmate for the Egg Banjo, money from friend for your dream Valentine date, or cash advance from your office colleague to pay for Christmas celebrations, it was always present.
A simple concept but today it has slightly evolved into a more formal business relationship intent, which is to match people who want to borrow money with people who want to invest money, without the intervention of banks.
Of late, P2P lending is gaining widespread growth in number of countries across the world, including the US, Germany, China and the UK.
It has moved past the US$1 billion mark and expected to cross the US$2 billion mark within the next 12 months.
Over in the U.S, industry volume is now over US$50 million in new loans a month since the industry began in U.S back in 2006. With more than 100% year-on-year growth, it is one of the fastest growing investments around.
This lending facility seemed to have given a new lease of life with the emergence of P2P websites such as Lending Club, Zopa (love its complicated tagline: “We connect people who want to invest money with people who want to borrow money”), Prosper, RateSetter, Funding Circle, ThinCats and Market Invoice.
While Zopa has lent more than £200 million since it started in 2005, Funding Circle, specialising in business loans, has topped £34 million and RateSetter has reached £24 million.
Besides personal loans, these service providers also supply funds to businesses who may find they can obtain loans more easily, quickly and potentially cheaply than they could through traditional lenders. People who provide loans range from students and pensioners to wealthy family trusts and city traders.
P2P lending is becoming increasingly popular because of several factors:
1. Investors can earn double-digit returns.
P2P lending offers returns in the 6-10% range. While there are risks most investors are earning far more than they are in traditional fixed income investments.
2. Consumers want to get out of credit card debt.
People are trying to dig themselves out of credit card debt where rates can routinely climb north of 25% if a borrower misses a payment. Someone with decent credit can get a 36-month P2P loan at 12%, pay off their high interest credit cards and become free of credit card debt in three years. It is a win-win for the borrower and the investors who loan the money.
3. Banks are still not lending freely.
It is not news that bank credit remains tight. Personal loans are very difficult to obtain and small business owners continue to look for alternative means of financing.
As testament to its rising demand, the U.K government recently said it would channel £100 million to SMEs through alternative lending channels, including P2P lenders, hoping to bypass the mainstream banks, which are reluctant to lend. I am sure our local Ah Longs and Ah Lings are eagerly waiting for our treasury department’s announcement!
Perhaps with the improved budget, we shall see more creative advertising from them!