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Cleveland Fed Labels P2P Lending as “Predatory Loans”

by on November 11, 2017
 

There are many different aspects of finance, which are ripe for innovation. Peer-to-peer lending is one of those aspects which can make a big impact all over the world. According to the Cleveland Federal Reserve, this industry on par with the subprime mortgage market. An interesting correlation, that is a lot more positive than it sounds. It will be interesting to see how P2P lending plays out in the long run.

Everyone knows P2P lending is an industry well worth keeping an eye on. Although this sector has been prevalent for some time now, things are certainly accelerating as we speak. In the US, this business model has been around since 2006. It is a valid alternative to traditional bank loans. Both borrowers and lenders benefit from cutting out the intermediaries in this regard. At the same time, P2P lending is not without risks either.

P2P Lending is not all That Great

With many new players emerging, the competition has heated up quite a bit. Established names such as Lending Club and SoFi have made a good impact already. Unfortunately, none of these companies have had an easy time entering and remaining in this market. The number of problems – especially in recent times – has grown well beyond what one would expect. Moreover, things will get  a lot worse over time, unless something is done about this situation.

“The evidence we document, combined with the fast growth of the P2P market, suggests that the P2P industry has the potential to destabilise consumer balance sheets. Consumers in the at-risk category—those with lower incomes, less education, and higher existing debt—may be the most vulnerable. The overall performance of P2P loans strikingly resembles that of the subprime mortgage market before the 2007 subprime mortgage crisis.”

The whitepaper present by the Cleveland Federal Reserve paints a worrisome picture in this regard. In the P2P lending business, loans are not necessarily performing as one would expect. Helping people refinance previous loans is not always the case. Nor it is entirely true borrowers build up a better credit history. Serving the underbanked is sometimes true, but not necessarily in most cases. In a way, these loans are more predatory in nature. That is a very disturbing label to put on this innovative sector, to say the very least.

Header image courtesy of Shutterstock

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