There are a lot of ways to describe alternative finance (AltFi). It is referred to as peer-to-peer lending, decentralized finance, democratized finance and so on.
Despite the colorful language, its essence is very simple to understand. Alternative finance is the use of many small payments from many different people to fund a given project. Alternative finance is just another way in our modern society to raise money.
Typically, when someone needs a lumpsum of money they go to the bank or one individual. But these days, you can crowdfund your requested loan from hundreds of random people online. Industry leaders of finance refer to this as microfinance.
Microfinance has become possible because of smart financial applications. The development of hi-tech software, advanced cybersecurity and widespread accessible internet has enabled our financial markets to reach heights we have never thought possible.
The special thing about alternative finance, rather what makes it “democratizing”, is how inclusive and decentralized its network is. Alternative finance is controlled by the lenders and borrowers in its market. The rates are determined and chosen by the borrowers and the lenders of the given platform.
At P2PIncome, we provide in-depth analyses on alternative finance-based platforms. We determine their sustainability and understand what is truly at the core of their services.
Five tips to consider before investing in Peer-to-Peer lending:
- You will need at least 15 EUR or 20 USD
- Be prepared to verify your identity
- Do not invest what you cannot afford to lose
- Vet the platform before you invest
Peer-to-peer lending applications, which constitute most of the alternative finance transactions, aim to be digital banks. They aspire to provide individuals a bank account, a savings account, and a way to earn money.
The arrival of peer-to-peer lending is only a small part of a movement divorcing itself from the clutches of the bank. Around the world, people are seeing the inefficiency of getting credit from only one source. Hi-tech companies around the world who are inspired by alternative finance have sought their own measures to create applications that may not replace banks, but will learn to live with them.
Alternative finance can be likened to the power of the masses, and the banks are akin to the power of the few. However, the beauty of smart applications is that they have the capacity and design to out scale physical banks. Online banks don’t have any of the overheard or need of physical presence that banks have. This same lack of overhead fees also allows peer-to-peer lending platforms to be made cheaper, more affordable for borrowers, and a profitable venture for lenders.