Peer to peer lending in Nigeria is usually based on loan terms between three months and two years. A few factors affect the term of your loan, but most often, the amount of your loan and your loan grade weigh mostly heavily in determining the term. In this educational guide we highlight the taxonomy of peer to peer lending.
Based on application, peer‐to‐peer platforms can be classified into two categories.
- General platforms are designed for any individuals and small enterprises no matter of their borrowing purposes or motives.
- Professional platforms are designed for some specific application domains. For example, FarmCrowdy is an online investment marketplace enabling accredited investors to invest in agriculture opportunities.
- Peer funded (individual): Individual peer support is a new type of funding alternative for both borrowers and lenders. Peer funded loans are provided by regular individuals or peers and not financial institutions.
- Peer funded (group): Similar to individually funded peer loans, many hedge funds, bank endowment funds and other large investors fund personal loans through the peer-to-peer or social lending platforms. The difference between individual and group peer funded loans is typically the amount of money lent-groups typically lend greater amounts than individuals.
- Some sites post your application for up to 2 weeks, giving potential investors opportunity to review your application. Investors then decide to fund your loan, providing a portion of your total requested amount.
- The alternative way peer‐to‐peer companies’ fund your loan is by approving your application and drawing funds from a pool of blind investors rather than having investors individually review your application. In this case, you do not have to wait for your loan to be funded because the company decides to fund your approved amount in full, and the time to receive your loan is simply the time for confirming information and processing. Typically, this process takes a few business days, though some services offer same-day or next-day deposits if all paperwork is in order. After you receive your funds, you pay back your loan in equal, monthly payments.
Based on their adopted trading rules, P2P lending platforms can be classified into two categories.
- In this form lenders always pursue maximum profits. The interest rate is the most important factor affecting the lending transaction. Here a borrower will first create a loan listing to solicit bids from lenders by listing their profile, the reason of borrowing money, the required amount, and the maximum interest rate they can pay. Besides, the listing also contains the borrower’s credit information and the listing’s soliciting duration. If a listing receives more bid amount in its soliciting duration than the required amount, competition among bids will occur, that is, some bids with higher rates will be outbid and fail and the bids with lower rates will succeed. The final treading rate is the same for all winning lenders, which is the maximum rate in all-successful bids. The auction follows the “all-or-nothing” principle, that is, if the listing cannot receive enough money in time, it would be expired and all the previous bids would be also cancelled.
- Now, most typical P2P lending markets adopt a simple trading rather than competitive auction. Each loan is with a fixed rate and fundraising duration. The loans still need to receive enough money in their durations. The transactions on the loans that cannot receive enough money will be expired. The transactions are always effective no matter whether the raising will reach the goals or not.
Based on the different types of reward for lenders, P2P lending platforms can be mainly classified into four categories.
- Donation – In these platforms, lenders provide money to a fundraising campaign/project with receiving no reward or just a “thank-you” note.
- Reward – It is similar to donation-based platform in that funders give money to ventures without an expected financial return, but funders are guaranteed to receive a reward a non-financial reward.
- Equity – lenders receive returns in the form of the entrepreneur’s equity-based or profit-share arrangement.
- Lending – lenders receive fixed periodic income and expect repayment of the original principal investment. Some platforms such as Imeela allow the borrower to repay the principal to each lender without any interest.