Crowd source funding (CSF) and peer-to-peer lending (P2P) have seen many people attain alternative and convenient methods of funding and raising capital. On the other hand it has also seen investors utilize an alternative to stock markets to invest their savings and reap profits. One of the sectors that has received a huge boost is real estate. With a reliable source of investment property loans, more people have gone back to the sector that was previously avoided after the economic meltdown.
The question most people have is which option to choose between crowd source funding and peer-to-peer lending. The two forms are very different but thanks to sites that deal with both, there has been much confusion on which method best suits who. There’s a huge risk for both investors and people seeking funding when it comes to receiving funding from a company that claims to provide both forms of financing. This is because unlike P2P, which is simply a market place for borrowers to meet lenders and compare the terms to find the most suitable, a CSF company is where investors look for equity in the most rewarding prospects. This difference in approach and nature places the following risks for those who seek loans in a company that does both crowd funding and P2P.
1. Higher rates
When it comes to the borrowers, they face experiencing high rates on loans advanced to them. This is because unlike exclusive P2P firms where investors mitigate their risk by having the option on which loans to invest in and having the credit history of the borrower to guide them, CSF investors do not have such an opportunity. Thus the only option left is to mitigate their risk by having higher interest rates on the loans.
2. Higher risks for investors
Usually, the risk that comes with investment in crowd funding projects is high. However, this is increased by the addition of P2P business since the company is not well facilitated to handle both types of business and the investor has little to protect them should the borrower default payment.
3. Conflict of interests
CSF is usually in its pure sense more favorable to the investor since they face a higher risk on their investments. On the other hand, P2P employs a fair approach where the borrower gets to set the terms and the lenders bid on loans they find favorable. By combining the two businesses a conflict is created amongst lenders and borrowers and no party gets served satisfactorily.