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P2P Lending
Explore the rise of P2P lending. Learn how it works, its benefits, risks, and top platforms shaping the alternative lending market.
Explore the rise of P2P lending. Learn how it works, its benefits, risks, and top platforms shaping the alternative lending market.
The Peer-to-Peer (P2P) lending market is expected to reach unprecedented levels in the coming years. In 2024, it was valued at $218.7 billion, and by 2032, it is projected to grow to $1,045.4 billion.
Such statistics indicate a gradual shift away from traditional banks in favor of alternative lending methods. This can be considered one of the lending trends of modern society.
P2P lending refers to a type of lending in which individuals can borrow money directly from other individuals without the need for banks or other financial institutions as intermediaries.
Today, users have access to numerous P2P lending platforms, including Funding Circle, LendingClub, Upstart, and others.
This type of lending is popular among consumers due to its ability to provide credit funds quickly and easily. How does it work?
1. Investor account creation. An individual lender (investor) creates an account on the platform and deposits the amount they intend to use for financing loans.
2. Borrower application. Potential borrowers create an account on the platform and submit a loan application.
3. Risk assessment & loan terms. They are assigned a risk level, which affects the loan terms. The higher the risk level, the less favorable the interest rate offered to the applicant.
4. Investor loan selection. Investors select the loan they are interested in financing.
5. Platform facilitation. The platform manages the loan agreement, processes payments, assesses the applicant’s creditworthiness, and ensures financial fraud prevention.
P2P lending allows individual lenders to earn more than traditional banks offer.
The interest rate on popular P2P lending platforms can reach up to 36%, whereas in banks, the maximum rates do not exceed 21.5% (according to data provided by the Federal Reserve System, USA).
For potential borrowers, these services provide a way to obtain a loan almost instantly, without the lengthy procedures typical of banks.
However, despite their great potential, users of such services face a serious issue — a high level of fraud.
The more popular peer-to-peer lending becomes, the more widespread P2P fraud is on such platforms.
This type of fraud involves criminals tricking consumers into sending funds through P2P channels under false pretenses.
Fraud related to the illegal appropriation of loan funds is known as P2P lending fraud.
There are several common fraudulent schemes:
Criminals use a combination of real and fake data to create a nonexistent digital identity. This identity is then used to apply for a loan.
If the deception is not detected in time, the loan may be granted to fraudsters, who, of course, will not repay it.
Fraudsters often attempt to gain access to someone else’s account using various cyberattack methods, such as phishing or social engineering.
Once the account is compromised, they submit a loan application. After receiving the funds, the criminals transfer the money to their own accounts.
Fraudsters take out a loan and initially make regular payments to build trust with the lender. Once their credit limit is increased to the maximum, they withdraw the funds and disappear.
According to analysts, this type of fraud is the most common and causes the greatest financial losses.
This criminal tactic involves taking out multiple loans simultaneously. Since investors cannot track this fact, the financing of transactions gets approved.
Over time, the financial burden becomes excessive. Consequently, such loans remain unpaid.
Given the ingenuity of fraudsters, P2P lending platforms must devote significant attention to fraud prevention.
Traditional scoring models fail to meet the needs of modern lenders. This is because financial information and personal data can be easily falsified.
To reduce the number of fraudulently issued loans, alternative data for P2P lenders is increasingly being used. This refers to any information about a potential borrower beyond what credit bureaus provide.
One of the most informative sources of alternative data is a consumer's digital footprint, the information left behind on the internet from their online activity.
This includes:
All this information makes combating fraud schemes in P2P lending as effective as possible.
How Data-Driven Decisions Enhance P2P Lending
Combating Fraud With Digital Footprint Analysis
The 7 Lending Trends Reshaping Credit Scoring
Financial Fraud Prevention Using Digital Footprint Analysis