Facts about “high” interest rates of peer-to-peer lending in Vietnam

In the financial context, any debt must always have its interest. Depends on companies, the interest rates, calculation, and collecting methods are different. Nowadays, there is a business model that utilizes online services to connect investors to potential borrowers known as peer-to-peer (P2P) lending. Although this model has been growing in many countries, yet in Vietnam, most of the public is still uninformed about it. So how does P2P work? Furthermore, does this lending model actually have “extortionate” interest rates as many people have perceived?

What is peer-to-peer lending, and how does it work?

As mentioned above, peer-to-peer lending utilizes online services and applications to connect people who has idle money with borrowers. At its dawn, many experts have asserted that the P2P lending model will be growing far and wide all over the world.

The core of P2P lending is to match the lenders and the borrowers, with an application that acts as a middleman to ensure connecting and transacting. Clients’ data are secured and the company is not allowed to interfere.

Facts about “high” interest rates of peer-to-peer lending

When considering of financial lending, we have to consider many different aspects, including: the lenders, the borrowers, and the connecting application. Since the model first appeared, the users have been using online loan services with a much lower service rate than traditional loan models due to low operation cost of P2P companies.

Upon participation in this model, the lender, or the investor, will be benefitted from a higher interest rate than that of saving or investing in any product or service of the banks. However, it does not mean that the borrowers must endure an extortionate rate in returns, in fact, they also get a lower interest rate even though the P2P company have deducted the cost of building an infrastructure to connect and rank credit online.

Let’s analyze one of the P2P companies to have a better picture. At Mofin, if the borrower is a student, after completing the loan application for 3 million VND (~ 129 USD) within 15 days, the tip fee will be 100,000 VND (~ 4,3 USD). As for 100,000 VND, equal to 2 cups of coffee, consider it as a gratitude of the borrower to the lender and the middleman company. Moreover, if the student has excellent academic score, they are allowed to borrow through Mofin with “0 VND” fee, i.e. no extra cost to the loan amount. So, where is this “extortionate” rates of P2P lending?

Mofin with “0 VND” fee, i.e. no extra cost to the loan amount.

On the other hand, P2P lending is an unsecured loan model, the borrower does not have to put up any other documents, the application procedure is relatively simple, and the imbursement process is fast as well. Thus, as to people who need money in a short notice while does not want to let their friends and families know, the tip fee is quite reasonable.

What are the differences between the genuine P2P lending model and the fraud one?

Among thousands of P2P companies, how do we know which one is genuine? As the matter of fact, P2P lending model has a low-cost operation, utilizes Big Data and information technology on the mobile app, which results in helping borrowers to access their financial needs faster, while letting the investors to easily track their income.

In the UK and the US, the P2P model has to complied with strict regulations on loan and capital management of the governments. In the UK, P2P lending companies must meet the capital standard requirement, and have to determine the risk of both lenders and borrowers. In the US, in order to operate, the lender must follow SEC’s regulations and process to release registered share. In conclusion, the genuine P2P lending model must be transparent to strictly control investments and loans.

Unlike normal lending models, the P2P model in countries with unstable bank and financial institution might turn into a fraudulent one. Notably in China, since the P2P model first appeared in 2007, there are roughly 4000 P2P companies nowadays, including 2000 companies that have been shut down by the authorities.

Generally, legitimate P2P lending companies will not meet many obstacles and risks in maintaining and growing thanks to their transparency, and their stable foundation. Hence, the question of “extortionate” rates of P2P lending is wholly unnecessary and brought attentions to many people.