What is P2P Lending, Crowdfunding & Shadow Lending?

1.       What is Peer to peer (P2P) lending?

·         P2P lending is the practice of lending money to individuals or businesses through online services that match lenders directly with borrowers.

·         P2P lending companies offering these services operate entirely online, they can run with lower overhead and provide the service more cheaply than traditional financial institutions.

·         As a result, lenders often earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates (even after the P2P lending company has taken a fee for providing the match-making platform and credit checking the borrower).

2.       What is Crowdfunding?

·         Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money.

·         It is the practice of funding a project or venture.

·         There are 3 types of crowdfunding: 

1)      Debt crowdfunding: Investors receive their money back with interest

2)      Equity crowdfunding: People invest in an opportunity in exchange for equity. Money is exchanged for a shares, or a small stake in the business, project or venture.

3)      Donation crowdfunding: People invest simply because they believe in the cause & expect nothing back. Returns can be offered such as acknowledgements. Returns are considered intangible.

3.       What is Shadow Lending?

·         Shadow lending is private lending done outside the walls of a traditional bank. Example, if your parents loaned you $50,000 for a down payment, they are shadow lenders.

·         Turning into shadow lenders has become an alternative to applicants who found it becomes more difficult to secure traditional mortgage financing from traditional bank due various reasons such as government intervention, banks continue to narrow their qualifications & etc.

·         In other words, while the banks continue to narrow their qualifications, alternative lenders (private mortgage lenders) are filling the void and creating products priced based on risk. Sure, these products might come at a higher rate than a traditional mortgage. 

·         In many cases, the loans are financed by wealthy investors and high-net-worth individuals seeking higher returns than those provided by the stock markets.

·         The lenders are unregulated. For borrowers who are unable to secure financing from the big banks, they will turn to private lenders such as mortgage investment corporations for help. There’s a transfer of risk from the regulated part to the unregulated part.