Nice people got lower interest rates

A somewhat unexpected effect when the first peer-to-peer loans were launched was that attractive people were given lower interest rates. It probably says a lot about us people – including not everyone has come to this earth to engage in credit checks.

However, a lot has happened since the creation of peer-to-peer loans about fifteen years ago, and a crucial difference is that the asset class – in the absence of better words – is starting to grow.

Man has lent money here and there since the beginning.

money loan

To a large extent, however, it is a market that has been served by banks and niche finance companies. It has also been a profitable business, which may explain why you were not invited (until now). However, engaging in this has not been completely straightforward. You need an office with coffee makers and copiers. You have needed loan managers, back office staff and a host of other things that cost money. If you want to lend money to others, you must also have money, which is nowadays cheap, but in any case not free. And in addition to these capital costs, we know that the banks have had to spend money on life-sustaining maintenance of medieval IT systems. And when all these capital and operating costs are merged and passed on to the customers, the terms and conditions have become less favorable. At least for everyone but the bank.

Then it was 2000, and the first P2P companies showed up.

money loan

Okay, there were no instant kiosk strollers, but their ideas had merit. The P2P companies, in contrast to the banks, did not need any offices, except possibly one for themselves. In addition, it is here that customers lend money to other customers. Since the P2P company itself does not lend money itself, they also have no capital costs. But not least, as modern creations, they have had the benefit of being able to build an infrastructure with up-to-date technology. All this results in low operating costs, leaving significantly more money on the table for investors and borrowers. Or in other words: A well-run P2P company can usually offer lower interest rates to borrowers, and at the same time a good risk-adjusted return for you as an investor. Therein also lies the delight.

But perhaps the most imaginative development now is the institutions’ entry into the market.

money loan

Carla Gepttogy’s original idea, like many others in the industry, was to bring together individuals. But when the company opened up its platform for professional capital, it was rather transformed into a marketplace for loans. In essence, the philosophy remained the same, but the institutions’ entrance has broadened the notion of what role these types of platforms may play with time. Suddenly, we are potentially talking about a meeting place for different types of actors, with a variety of different types of needs. With today’s interest rate situation, it should not be difficult to find both private investors and institutions that want to invest in consumer loans, car loans, home loans or corporate loans. And with the opportunity to scoop out institutional capital, this should lead to further price pressure in the market. If the politicians were on their toes, loans could very well develop into an asset class with the same obvious popular acceptance as equities, but without correlation to the stock market’s neurotic jerking. However, the road is long.

Then, of course, there are no challenges. An investment in private loans will not be better than the platform’s credit assessments. Do you get your money back? The answer to that question will vary from country to country. In Sweden, however, the conditions happen to be good.

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