Loan Application Process
While the process vary for different platforms, it generally involves the following. A would-be borrower come to the website, register and fill up their application. The platform verifies the identity and analyzes his creditworthiness. If qualified, the borrower’s loan is posted to the marketplace and lenders can start funding his loan.
Some platforms may use different types of match-making and may skip the credit analysis altogether and rely on online reputation alone. Some depend on third-party providers to do the background check on their borrowers.
How The Transactions Happen
Peer-to-peer lending platforms generally adopt three kinds of transaction matching methods:
- Pure Marketplace In the pure marketplace model, lenders and borrowers are free to set the interest rates they want. Loans are “opened for auction” for a certain number of days and the borrower sets his desired interest rates. Lenders are free to submit their bid amount and interest rates. In the end of the auction period, the system pools the best-priced bids and pooled it into the funds for the borrower, while the rest of the bids are refunded to lenders. The rate that the borrower pays is the weighted average of the bids. This model usually also allows the borrower to close the auction early if he is willing to pay for the current rates that the lenders are offering, often higher than his desired interest rate.
- Fixed Interest Market In this model the Platform usually sets the interest rates for the loans, often based on the level of risk. The lenders then purchase parts of the loans that they like until the loan is fully sold. This model assumes that the Platform has better expertise and so helps lenders in judging the risk and reward of each loan. It also usually allows for quicker matching than the pure marketplace model.
- Fully Managed Funds With the fully managed funds model lenders give the Platform full authority to manage their funds, which are then managed as a pool of funds. The lender then decides which loans get funding and what interest rates and allocate the funds accordingly. In Indonesia this model may be illegal unless the Platform has a fund management license from OJK. But this model does offer advantages in the form of even quicker loan funding and helps the users reinvest their idle funds.