Simpler, safer P2P lending: the value of choosing a hybrid model
If you’re looking for an efficient and user-friendly way to invest, you may be exploring online peer-to-peer (P2P) lending – and wondering which platform can offer you the best value for your money based on your investment objectives and preferences. A strategic way to kick off the selection process is to compare the different P2P lending models, which continue to evolve as new players enter the ecosystem.
The approach that most people are familiar with is the pure P2P lending model, which first emerged as an innovative and accessible alternative to high-street banks. For investors, this model offers an opportunity to:
- lend directly to borrowers with relatively small investment amounts;
- and typically benefit from higher interest rates than they would through easy-access cash savings accounts at retail banks albeit with a higher degree of risk.
Being digitally-driven, pure P2P platforms are also lightweight and agile, which supports shorter turnaround-times and a simpler, more transparent customer experience for both lenders and borrowers.
How pure P2P lending works
This type of model offers a digital marketplace that matches borrowers and investors, without the business financially committing to the transaction. Pure platforms earn revenue from loan origination and servicing fees. Thus, growing the business relies heavily on the platform’s ability to continually attract higher volumes of investors and borrowers. This can be a challenge during slow economic times or as bank savings products become more competitively priced. If these platforms cut their lending costs to attract borrowers, their lenders lose out.
What’s the alternative?
Another approach is the balance sheet lending model, which existed long before pure P2P platforms entered the market. Balance sheet loan originators put their ‘skin in the game’ by lending their own money – and therefore shouldering the credit risk internally. If the loans are not repaid, the balance sheet lender loses money.
P2P platforms, on the other hand, do not lend their own money and simply match borrowers with investors. It is the investors that ultimately bear the risk of losses.
However, the balance sheet lending model is more capital intensive than the pure P2P model. This provides P2P platforms with the potential to be far more scalable.
Bringing you the best features of both pure P2P and balance sheet lending
Loanpad offers a new hybrid lending model that combines the benefits of the pure P2P lending model and the balance sheet lending model. With Loanpad, balance sheet lenders (with their incentive to stay safe and only originate good loans) share loans with investors, who benefit from that quality assurance.
Simultaneously, by harnessing advanced technologies, the Loanpad platform offers an uncomplicated, user-friendly investment experience – providing the speed, efficiency and simplicity associated with pure P2P lending platforms.
In essence: Loanpad offers lower risk P2P investment suitable for the mass retail market that’s as simple to operate as using a bank account. Yet it offers higher interest rates than traditional savings accounts due to the lending model albeit with a higher degree of risk.
An innovative way to manage risk
Loanpad is a pure matchmaker and does not lend any of its own money. Rather, it partners smaller investors with established property lenders (who are balance sheet lenders and therefore ending their own money).
Over and above this benefit, the established property lenders (lending partners) take at least 25% of each loan on a first-loss basis – putting ‘skin in the game’ and shielding the smaller investors from initial losses. This structure provides further safety and quality assurance.
Loanpad loans are converted into two disparate risk classes:
- A lower risk senior part for smaller investors
- A higher risk/return part for lending partners
The lending structure aims to minimise the chances of any loss, as well as the impact should a loss occur. It achieves this by both diversifying investors’ portfolios across the entire performing loan book, daily (reducing impact of any losses) and ensuring that the lending partners hold their tranche on a first loss basis (reducing chance of any losses).
Loanpad earns revenue from a margin between rates paid by borrowers and rates paid to investors. Thus, its income is aligned with that of its investors. This, combined with the fact that Loanpad investors have a direct loan relationship with the underlying borrowers, means that Loanpad aims to offer a hybrid P2P lending structure that is stable, simple and efficient.
Check out our ‘invest’ pages to learn more about model and apply today for our either our Classic or Premium lending account.
