by: Grow VC Group
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A recently emerging application is P2P lending, which connects lenders and borrowers virtually, completely bypassing traditional financial institutions. Although these marketplaces offer a higher return to lenders due to lower transactional and operational costs, it’s essential for investors to accurately evaluate the credit risk of the different loans when considering capital allocations. 

To mitigate this risk, banks use historical information, meet clients in person and employ risk experts to categorize borrowers according to their credit risk. The information asymmetry of P2P lending platforms therefore puts lenders at a disadvantage when discriminating between different borrowers’ creditworthiness. To deal with this, P2P lending platforms have oriented their lending process into a more transparent environment. Lenders are provided with detailed information about the loan itself and historical information about the borrowers regarding paying off previous loans.

Determining default risk of borrowers is the biggest challenge that investors face and is entirely based on information provided by the marketplace operator. Lenders are able to allocate their money efficiently if they know which characteristics determine the borrowers’ credit risk. Hard information provided by platforms regarding the creditworthiness of the borrowers includes annual income, indebtedness, past delinquencies, credit history, loan size and maturity. They also provide less quantifiable information such as the loan purpose, gender, age, country and in rare instances the borrower’s picture.

It is important to determine the relevance of information provided by platforms for the lenders decision-making, what is certain is that as platforms build historical data and with it, consumer insight, the technology should allow credit scoring and rates to become more accurate. Meanwhile, marketplaces should focus on attracting borrowers with good credit rating and improve mechanisms to recover funds when borrowers default, in order to reduce overall credit risk in this fast-developing market.

Read the whole article on Grow Advisors Blog.

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Grow VC Group The Grow VC Group is the world leading, global pioneer of securities crowd funding, peer to peer marketplaces, new investment models and global business development. Established in 2009, the Group has developed new investment models on six continents and continues to innovate the global market.

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This entry was posted on Thursday, February 11th, 2016 at 3:00 am and is filed under Business Updates. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.