Member-only story
Small Savers Helping Small Business
Peer to Peer (P2P) lending enables anyone with a small sum to save to provide support to small and medium enterprises.
The basic premise of such organisations is to spread the risk of any loan among multiple lenders so that, for example, a loan of $50,000 could be spread among 200 lenders. If the borrower defaults, the loss is similarly spread among those 200, according to the amount owed to each. At the same time, a lender with deposits of $5,000 could have that amount spread among 50 or more small business loans. The possibility of more than one, if any, of these 50 loans defaulting is very low, meaning the probability of losing $100 (2%) is very small. The other 49 loans are capable of earning double figure interest across the term of each.
The real advantage to both lender and borrower comes when lenders allow the monthly repayments on each loan accrue and be reinvested into new loans.
A single example will suffice. A man, I’ll call him John Doe, began saving with one such provider 5 years ago. Beginning with an initial deposit of €500 he has, over the years since, deposited a total of €6000. This is enabled him to support 265 businesses with loans totalling €21,750. He has earned €2,062 interest. His investment is now worth €7,797. The difference is…