Comparison To Other Financial Practices
Peer-to-peer lenders offer a narrower range of services than traditional banks, and in some jurisdictions may not be required to have a banking license. Peer-to-peer loans, are funded by investors who can choose the loans they fund; sometimes as many as several hundred investors fund one loan; banks, on the other hand, fund loans with money from multiple depositors or money that they have borrowed from other sources; the depositors are not able to choose which loans to fund.. Because of these differences, peer-to-peer lenders are considered non-banking financial companies.
Similar to retail banking, peer-to-peer lenders execute transactions directly with consumers, rather than businesses or secondary financial intermediaries.
Like community development banks and alternative financial services institutions, some peer-to-peer lenders originally targeted customers from "financially underserved", low- to moderate-income demographics by providing loans that they could not practically obtain from traditional banks. This feature has been decreasing because such borrowers are more likely to have difficulties with paying back the loans, and peer-to-peer lenders have started to refuse their loan requests.
Peer-to-peer lending differs from cooperative banking, credit unions, savings and loan associations, building societies, mutual savings banks and other similar non-bank mutual organizations in that lenders and borrowers do not own the intermediary and are not granted membership or voting rights to direct the financial and managerial goals of the organization; the roles of both borrowers and lenders are kept distinct from that of the owner. The borrowers, lenders and owners are not required to share any common bonds (such are of locality, employer, religion or profession). Operating costs are funded not only by customer fees but also by investments from private investors. The goals of operation are neither non-profit nor not-for-profit but to maximize profit.
The latter characteristic distinguishes peer-to-peer lending also from person-to-person charities, person-to-person philanthropy, collaborative finance and crowdfunding which create connections between donors and recipients of donations like peer-to-peer lenders but are non-profit movements.
Peer-to-peer lending differs from microfinance by not lending to (small) businesses and groups of micro-entrepreneurs but to unrelated individuals for their individual needs. It differs from microcredit by lending to borrowers with verifiable credit history; the loan amount can be larger than microloans and although collateral is not requested, it is not assumed to be non-existent.
Compared to stock markets, peer-to-peer lending tends to have both less volatility and less liquidity.
Read more about this topic: Person-to-person Lending
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