Alwin Goh
Peer-to-peer lending or P2P lending is a part of financial innovation that originated in the UK in 2005. It has become an investment and lending platform that has reached major financial markets worldwide, and Singapore is no stranger to P2P lending. It has adopted this FinTech tool for borrowing and lending money.
In this guide, let’s discover more about P2P lending, including its pros and cons and the associated risks. Is it a better loan option for borrowers? And what are the risks it poses to lenders?
What is Peer-to-Peer Lending?
Peer-to-peer lending or P2P lending is a FinTech tool allowing you to borrow and lend money without going to a bank or financial institution.
P2P lending has two main features. One, it serves as a borrowing platform to individuals. Second, it is also an investment tool for lenders. It allows them to lend their extra money to borrowers and generate returns through repayments.
Moreover the P2P platform facilitates the communication between borrowers and lenders. Also, it evaluates the request from borrowers prior to posting them on the website or app.
The lenders will look over the applications and invest based on their risk and return requirements. Usually, numerous lenders fund a single loan. In this way, lenders can diversify their exposure to risk.
Although a borrower or a lender can benefit from P2P lending, it is still important to have a comprehensive grasp of its pros and cons.
Pros and Cons of Peer-to-Peer Lending in Singapore
Pros and Cons of P2P Lending for Borrowers
P2P lending has revolutionised the lending environment by giving borrowers another means to get funds. Easy funding, flexible payback, and no collateral make this loan approach appealing. However, there are pros and cons to this borrowing choice.
Pros:
- Affordable interest rates with flexible repayment options.
- Flexible funds at varied yet affordable interest rates that suit your repayment capacity.
- Repayment amounts and timelines are more flexible than traditional bank loans.
- No collateral needed.
- Faster funding access.
- Less documents required.
Cons:
- Borrowers must go through their application process.
- The platform requires additional fees for its services.
- Loan non-repayment may result in legal action from lenders.
- Despite MAS oversight, P2P lending platforms may still encounter security issues.
- No assurance of getting the desired loan amount.
Pros and Cons of P2P Lending for Lenders
Although P2P lending platforms facilitate lenders to supply funds to borrowers, it’s critical to understand that this type of investment has pros and cons.
Pros:
- P2P lending is another option to diversify your investments
- An opportunity to actively participate in Singapore’s expanding startup scene.
- Compared to other investment options like real estate, P2P lending has lower capital requirements for registration.
Cons:
- Repayment defaults do not hold the P2P platform liable.
- Because there is competition among lenders, interest rates may be quite low.
- Remains vulnerable to security concerns.
- Your returns are subject to platform service fee deduction.
The Risk of Peer-to-Peer Lending in Singapore
Risks of P2P Lending for Borrowers
In the ever-changing world of personal finance, peer-to-peer (P2P) financing has become a powerful alternative to traditional lenders. P2P lending can provide funds quickly, but borrowers must remember that there are associated risks with this loan option.
1. Security
P2P platforms require borrowers to provide a lot of personal information to get a loan, which increases cybersecurity risk. Since private organisations host peer-to-peer platforms online, you can’t be confident there won’t be any document or money transfer security breaches.
2. Interest Rates
Not all P2P platforms have fixed interest rates. Credit score and company history determine interest rates. If your credit score is low, you may pay a hefty interest rate.
3. Lack of Investors
While there are more P2P investors than in 2005, there is also more competition. Your platform may have many loan applications, making it challenging to attract lenders.
4. Feud with Lenders
If you keep defaulting, the lender/investor might take the loan amount. Some P2P platforms propose lenders send problematic debts to debt collectors. However, lenders may not follow this path. Thus, lenders may use unlawful or aggressive means to recover the money.
Risks of P2P Lending for Lenders
With the possibility for increased profits and portfolio diversification, lenders have enthusiastically adopted this lending approach. However, investing in P2P lending has associated risks.
1. Security
Cybersecurity breaches may affect lenders. Although P2P lending platforms are regulated by MAS, traditional banks have more controls. Therefore, peer-to-peer lending platforms put your funds and sensitive information at danger.
2. Repayment
Borrowers can borrow without collateral. They may also have a lower credit score than banks require. This increases the chance of non-repayment. There’s few regulations to ensure borrowers return their loans in full. Additionally, loans would not be insured. In event of payment default, lenders will have a hard time.
3. Liquidity
With P2P lending, investment returns may take longer. The loan is repaid in installments, so you can’t withdraw much until it’s paid off. Your earnings come from interest, which takes time. Therefore, P2P investments are not a good choice if you want fast returns.
4. Loss of Returns
It’s possible that the borrower will repay the loan early as most P2P platforms offer flexible payback arrangements. You may lose the interest you would have earned if the loan was active for a longer period of time.
5. Fraudulent Applications
P2P platforms verify every application, yet fraud is still possible. The worst part? The risk of lending to a fraudulent application is high. Be cautious and watchful instead of relying on P2P.
P2P Lending vs. Personal Loans
Peer-to-peer (P2P) lending and personal loans are among the popular borrowing choices in Singapore. These financial tools offer funding for diverse purposes, each with its own benefits.
Discover more about the best personal loans in Singapore with our handy guide.
Online platforms connect borrowers with lenders or investors in P2P lending. Banks and licensed money lenders offer personal loans.
We will compare eligibility, interest rates, loan amounts, payback terms, approval times, security, and additional costs between these two financing choices.
| P2P Lending | Personal Loans | |
| Loan Provider | Individual lenders or investors on peer-to-peer platforms | Licensed financial institutions, banks or licensed moneylenders |
| Eligibility | Lender or investor may be more lenient with the eligibility criteria | The criteria for loan approval may differ based on the specific lending choice, but generally, it revolves around factors such as the borrower’s income, creditworthiness, and capacity to repay the loan. |
| Interest Rates | Competitive, based on the borrower’s financial profile. | The monthly interest rate is not so high for banks and financial institutions. |
| Loan Amounts | Depends on needs, however loan limits may apply. | Get up to 4-6x monthly income |
| Repayment Terms | Flexible to borrower needs | The repayment period for this type of loan often ranges from 1 to 7 years, with fixed monthly instalments. |
| Approval Time | Within a day | Within a span of two business days for banks or within a matter of minutes when dealing with licensed lenders. |
| Security | Subject to security risks and regulatory changes | Security is ensured when applying with licensed financial institutions or banks. |
| Additional Fees | Platform service fees | Prepayment charges, late payment fees, or early repayment penalties may be applicable. |
Learn more about how personal loan in Singapore works.
So, Is P2P a Good Alternative to Other Loans?
Peer-to-peer (P2P) lending can be a viable alternative to bank loans. This unique structure connects borrowers directly with individual lenders or investors via online platforms, offering eligibility, interest rates, and flexibility advantages. P2P lending appeals to individuals with unconventional financial profiles or who want lower interest rates.
But, P2P lending has its own risks, mostly connected to security and potential regulatory changes.
P2P lending may be right for some, but borrowers should consider their requirements, finances, and risk tolerance before applying.
An individual’s circumstances and choices should choose whether to use P2P lending or traditional personal loans. Both choices offer pros and cons, so choose based on your financial goals and capacity to repay the loan.
No matter your path, responsible borrowing and understanding the terms are vital for a smooth and successful borrowing experience.
Are you still looking for a fast cash loan option? Apply with Crawfort and get your personal loan approved in 8 minutes.
