The Rise Of Alternative and Peer-To-Peer (P2P) Lending
There are many different financial options on the market — home loans, car loans, student loans, borrowed capital to get a small business off the ground — and without them, so many essential transactions and businesses struggle to take shape. However, most of these options only help companies or individuals making large purchases. For decades, banks and other traditional financial institutions have held a virtual stranglehold on the lending landscape, but that’s all changing as services such as SoLo Funds use the power of peer-to-peer lending to give individuals access to emergency funds at the tap of a button.
Alternative lending began to be popularized in the wake of the 2008 financial crisis and subsequent Great Recession. Peer-to-peer mobile apps represent one of the newest entrants to the alternative lending market and have made quite a name for themselves in a fairly short period. Here, we'll take a closer look at how alternative and P2P lending emerged, and how the latter stacks up against more traditional financing options:
The ever-evolving alternative lending universe
Alternative lending dates back to the mid-2000s when sites like Prosper and Lending Club first launched, as noted by Money Under 30. This form of lending experienced a huge surge in the early and mid-2010s, and didn't really show any signs of slowing down until the last couple of years: According to CB Insights, some of these firms had more sustainable business models than others, meaning that while a number of important players remained on the scene and occasionally even became publicly traded companies, quite a few were absorbed by larger financial organizations in mergers or fizzled out altogether.
Loan approval rates among alternative lenders were initially massive, especially during the aforementioned 2010-2015 heyday. These organizations were attracting individuals and businesses in need of financing away from the banks and institutional lenders, many of which, in the uncertain post-2008 years, had either lost the public's trust, made their approval criteria prohibitively strict, or both.
Around the midpoint of the 2010s, the pendulum swung back somewhat in traditional lenders' direction as the American economic situation considerably improved. According to May's edition of the Biz2Credit Small Business Lending Index - the most recent month for which data is available - institutional lenders boast a 65.5% approval rate (a slow but steady uptick from the past year), while alternative lending firm's likelihood of approval stands at 57.1% (in a gradual decline).
Alternative loans still a force to be reckoned with
While they face much fiercer competition than they did in their years of immense growth, alternative lending platforms remain a viable option for many consumers, especially individuals. It’s true that while banks have been increasingly open to lending their funds, their loan approval rates are still fairly low (27.5% for larger banks, 49.9% for smaller institutions). Alternative firms have historically been more open to borrowers with lower credit scores than other financiers, though interest rates are often high - sometimes dangerously so, reaching over 20% and even 30% for low-credit applicants. It’s often frustratingly difficult for an individual to secure a loan, and options for short-term cash injections are almost zero.
SoLo solves all of these hangups with its own take on the P2P platform. Users can sign up for the app and start acting as both a lender or a borrower that same day. Borrowers can take out loans of up to $1,000, and they set the own terms for repayment (date, interest rate, etc.). Lenders can earn tips and help others by providing capital to users in need of a loan. SoLo users are assigned a “SoLo Score” that relates to their past repayment behavior and can be utilized as a guide when lending decisions are being made. To date, SoLo has transacted over $2.5 million in loans in their marketplace, with many more to come!
The appeal of Peer-to-Peer
As their full name implies, P2P loans don't connect you directly to a lending institution but rather to an individual investor who uses an alternative-lending firm as the middleman to endorse the transaction. Terms can vary quite a bit from loan to loan and may be determined by the investor, the institution, or a combination of the two. As a result, interest rates can still be high if your credit is either mediocre, low or barely there — and if you're working with a P2P lender to obtain a four- or five-figure loan (to start a small business, for example), APR can easily be somewhere in the teens regardless of the state of your credit.
Despite those factors, it's still well worth your time to strongly consider what you can get from a P2P loan, especially if you've had a hard time with other lenders on the more traditional end of the spectrum. And for small loans you need in a pinch, don't forget to look at what the SoLo Funds community has to offer!