A peer-to-peer (P2P) lending company operates by matching borrowers with investors through an online platform. Borrowers apply for loans and investors can choose to fund them. The P2P lending company typically acts as an intermediary, handling the loan origination, underwriting, and servicing. They may also charge fees for their services, such as an origination fee to borrowers and a servicing fee to investors. The business model for P2P lending companies is to generate revenue from these fees, while providing borrowers with access to capital and investors with the opportunity to earn returns on their investments.
The risk of loan default is primarily borne by the investors. When borrowers apply for a loan, the P2P lending company will typically perform a credit check and assess the borrower's ability to repay the loan. If the borrower is approved, their loan listing will be made available to investors on the P2P lending platform. Investors can choose to fund all or a portion of the loan, and will receive interest payments from the borrower as the loan is repaid.
However, if the borrower defaults on the loan, the investors will not receive the expected interest payments and may lose some or all of the principal they invested. Some P2P lending platforms may offer some form of protection to investors, such as a buyback guarantee, but it is ultimately the investors who are taking on the risk of default.
Expenses include:
Technology and platform development: A P2P lending platform must be built, maintained and updated to handle loan origination, underwriting, and servicing.
Marketing and customer acquisition: P2P lending companies must attract borrowers and investors to their platform.
Regulatory compliance: P2P lending businesses must comply with the strictest laws and regulations among most businesses.
Credit risk management: Credit checks and loan underwriting involve a lot of investment of employees and capital.
Servicing and collections: Thisnincludes loan servicing and collection of payments from borrowers. Collections are especially difficult in a P2P business as compared to traditional lending businesses.
Investor servicing: Investors need information about the loans they are invested in.
Legal and accounting: P2P lending companies will have to incur expenses for legal and accounting services, like any other business.
Staffing: These include salaries and benefits for employees.