The growth of peer-to-peer lending or P2P has attracted the attention of Wall Street investors. However, their arrival also brought risks to the sector.
Sharp interest rate changes or other type of economic problem could cause the Wall Street investment to exit as fast as it entered the P2P market. The question of how the players in the industry vet borrowers and whether interest rates reflect risk also remained to be answered.
Still, the influx of investments would enable lending companies in this sector to offer more loans and, in this way, directly compete with brick-and-mortar banks. According to Lending Club and Prosper Marketplace, two leading P2P companies, per year, there was a 300% growth in loan originators including hedge funds, pension funds, and endowments.
P2P lending initially started in 2006 with the launch of Lending Club and Prosper Marketplace. The two companies were dubbed as a new breed of internet lending companies that offered attractive returns to investors while it gave creditors with low interest rates.
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