A method of debt financing that gives people the option of borrowing and lending money without involving official financial institutions as intermediaries is defined as peer to peer lending. Also referred to as crowd-lending or social lending, one of the primary benefits of P2P lending is that it eliminates the middleman. However, it is important to remember that there is more effort, time and risk involved as compared to the typical borrowing and lending process.
Traditionally, when people or businesses wanted some finance, they had to reach out to a bank and apply for a loan. Once your loan application was submitted, the bank would take some time in running extensive financial background checks, which involved reviewing their credit history, to ensure they were eligible for the loan. In addition, they also used the results for determining the interest rate that would be charged. If you had poor credit history or there was a higher risk, banks would either reject your application or charge a higher rate of interest. With peer-to-peer lending, you don’t have to go deal with these hassles anymore.
This form of lending now allows people and small businesses to take loans from investors who are willing to lend the money at an agreed interest rate. A peer-to-peer online platform brings the lender and borrower together. The investors assess the profile of the borrower to determine if they want to take the risk of lending their money to them. It is possible they lend the entire amount asked by the borrower or only a portion of what was asked. If the latter happens, it is possible that another lender on the peer lending marketplace may fund the remaining loan. Hence, multiple sources may loan the money in P2P lending, which means that monthly repayments have to be made to each of them.
Borrowers find P2P platforms immensely useful because they can connect them to lenders who have very attractive interest rates as opposed to banks. As far as lenders are concerned, they can also benefit from this form of lending because it enables them to generate interest income. This amount is considerably higher that the interest they get by investing in different saving vehicles such as CDs and saving accounts. As a matter of fact, the monthly interest payments may actually be higher than the return generated from investments in the stock market. Borrowers also benefit because they are able to get finance even though they wouldn’t have gotten approval from standard financial organizations and intermediaries.
Moreover, they are also able to get a better interest rate than what would have been charged by the bank. This form of crowdfunding is great for those who are looking for personalunsecured loans, commercial and real estate loans, student loans and payday loans amongst others. Some lenders may ask for collateral in the form of luxury assets including jewelry, watches and fine art. As there is a risk of a borrower defaulting, P2P lending platforms give complete freedom to lenders in choose who to give loans to and diversify their money amongst different borrowers.