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How much do you really know about peer to peer lending? Did you know that peer to peer lending has become such a force to reckon with that the banking world is threatened? If you are trying to understand peer to peer lending for the first time or have a good grasp of it, this post will tell you more about it.
Peer-to-peer lending is commonly abbreviated as P2PL. It is the practice of lending money to unrelated individuals, without going through a traditional financial intermediary such as a bank or other traditional financial institution. Therefore, investors on the MYC4 platform are able to lend money to borrowers in Africa who they have never physically met or interacted with.
This lending takes place online on peer-to-peer lending companies’ websites using various different lending platforms. MYC4 is such a platform. The abbreviation “P2P” is generally used when discussing the peer-to-peer lending or investing industries.
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Most peer-to-peer loans are unsecured personal loans. They are made to an individual rather than a company. The interest rates are set by lenders who compete for the lowest rate on the reverse auction model; MYC4 uses the Dutch auction model where investors compete for the lowest interest rate.
Lenders/investors mitigate the individual risk that borrowers will not pay back the money they received by choosing which borrowers to lend to, and mitigate total risk by diversifying their investments among different borrowers. The MYC4 platform allows investors to choose which borrowers they would like to lend to, based on several parameters such as type of business, gender, industry, etc. MYC4 investors tend to be interested in socially conscious investing. Peer-to-peer lending offers the possibility of supporting the attempts of individuals to break free from high-rate debt, assist persons engaged in occupations or activities that are deemed moral and positive to the community, and avoid investment in persons employed in industries deemed immoral or detrimental to community
The lending intermediaries are for-profit businesses; they generate revenue by collecting a one-time fee on funded loans from borrowers and by assessing a loan servicing fee to investors (either a fixed amount annually or a percentage of the loan amount). MYC4 is a for profit company whose mission is to raise capital for African entrepreneurs via an online marketplace and become a significant tool in the fight to end extreme poverty. “Business must be for profit but profit must also be for a purpose.” Mads Kjaer, CEO of MYC4.
One of the factors that might be considered a disadvantage in peer to peer lending is that the lender’s investment in the loan is not protected by any government guarantee. Bankruptcy of the peer-to-peer lending company that facilitated the loan may also put a lender’s investment at risk. Companies in the industry have measures in place to mitigate these risks.
Ultimately, peer to peer lending has much more advantages than any perceived disadvantages it may have. Peer to peer provides a win-win situation for all parties involved. Because many of the services are automated, the intermediary companies can operate with lower overhead and can provide the service more cheaply than traditional financial institutions, so that borrowers may be able to borrow money at lower interest rates and lenders may be able to earn higher returns. Compared to stock markets, peer-to-peer lending tends to have both less volatility and less liquidity. One of the main advantages of person-to-person lending for MYC4 borrowers has been better rates than traditional bank rates can offer. MyC4 investors get to participate in eradicating poverty through micro-credit by raising capital for African entrepreneurs, hence having both a social and economic impact.