Over the past couple of years, peer-to-peer (P2P) lending has become an excellent alternative source of business financing, especially for SMEs and start-ups. With peer-to-peer lending, SMEs and start-ups can secure the funding they need for business development. Not only that, peer-to-peer lending is attractive to investors too, with its high returns and easy-to-understand concept. However, with the rise of peer-to-peer lending, it is inevitable that some misconceptions may arise. Here are the 4 common myths and misconceptions about P2P lending:
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“You need a lot of money to invest in P2P lending”
False. In fact, one of peer-to-peer lending’s key advantages is its low entry barriers. At Funding Societies, you can start investing with a minimum first deposit of S$500. To diversify your investment, you can invest as low as S$20 in each loan. You don’t need much to get started at all.
As a P2P investor, you also have the flexibility to choose which loans to invest in, depending on the tenor and interest rate which appeals to you most.
“It is not a mainstream investment”
It depends on what you think of as “mainstream.” Yes, P2P lending as a concept has gained traction only recently, but there is really nothing new about a business model where investors pool together the amount needed for a loan requested by a borrower. But these days, P2P lending activities are easier to facilitate thanks to online platforms and digital technology.
“There are no regulations for peer-to-peer lending”
One of the typical misconceptions about peer-to-peer lending is that the model is yet to be regulated so investing in P2P lending or borrowing from a P2P platform can be risky. But it really depends on the region and country. In Singapore, MAS (Monetary Authority of Singapore) has issued a framework for the P2P lending model. Look for a local P2P lending platform that has been licensed!
“Peer-to-peer lending is crowdfunding”
Not really, but it’s easy to make the mistake. After all, peer-to-peer lending is a category of crowdfunding. Certain principles are the same, but there are a few differences between the two concepts. Crowdfunding pools resources from multiple individuals to gather financing for a particular project, perhaps a creative project or the creation of a product. Sometimes the individuals who help pitch in money for a crowdfunding campaign get rewarded with gifts and sometimes there are no physical rewards, similar to a donation.
Peer-to-peer lending, on the other hand, operates more like a lending and borrowing model. Investors and borrowers are connected through an online facilitator. Together, investors pool together finances for borrowers. The borrower will use the disbursed loan and repay his investors with interest.
“If you lend money on P2P platform, it will be locked for a fixed period”
Well, yes. A P2P investor is asked to commit funds for a fixed period, but for a shorter period than most other investments. On our platform, loan tenures range from 3 to 24 months, which compares favorably to other financial instruments.
We hope the above have dispelled some of the tangles and confusion. With its advantages, P2P lending is an attractive solution for both investor and borrowers. Do you agree?