If we talk generally, all lenders, marketplaces as well as the online platforms are ‘loan originators’. This means that they allow probable borrowers to request for a loan. While ‘marketplaces’ is a term that can be used to identify all online lending sites, there are certain marketplaces which can themselves serve as lenders. On the other hand, there may be others serving as investors as well and being a bridge connecting the matchmakers and the borrowers. The investors mentioned herein can be considered as private or the institutional; investors who may have a share in numerous loans.
What’s next, if I wish to Invest?
Once a decision is made by any investor, regarding an online lending investment, he must make a choice regarding the marketplace through which is is to be made. Both the formats can be found easily by an individual in real estate funding, consumer loans, invoice financing alongside the other options. Yet, the difference lies in the potential of risk. The flow of money in the formats is different even if the origination of the loans may be in a similar manner. In the case of P2P lending, the investor owns and maintains an account. There is only a one – time requirement for finding, matching and funding the loan. After this, the capital investor by the individual begins to accumulate interest. On the other hand, in case of balance sheet marketing, the funds are maintained in an account of the marketplace. The same funds may have been sourced from the proprietary capital or other investors. In this case, the the fund source is the investors, the interest is already being accumulated, regardless of the lending or non-lending of the money.
Where’s the risk in the two formats?
Once you have decided which format to invest in, the next step is the evaluation of the risk factor. It is important that you consider not only the risk but more importantly, who carries the risk. The reality of the game is that nobody wants to bear the complete risk themselves. The same principle stands strong in the case of lending online and its risk evaluation. Most investors do not have the capability for pricing the risk, which means determining of who is appropriate to be funded and what must be the associated rate of interest. Generally, what investors rely on are platforms which provide a rating for the potential borrowers. Easing up on the lending criteria is generally tempting for the marketplaces for increasing the volume or achieving business goals. This means that investors must diligently perform check and also provide for a cover that includes not just the borrowers, but the marketplaces too. Of course, surprising shutdowns have been seen in the past with regards to publicly traded entities like the ThurstBuddy. This must serve as a strong warning as it left substantial losses to be covered by the investors.