Peer-to-peer lending is a new and popular type of lending that is rising in numbers. It is a type of lending that allows regular people to lend to and borrow from themselves instead of dealing with large financial institutions. A third party provides the prospective borrowers and lenders a platform through which they can deal with each other, but the third-party entity does not get overly involved in the transactions. This type of lending gives people a better chance to receive the funds that they need and have access to favorable interest rates. Some examples of sites that offer peer-to-peer lending are sites such as Prosper, Zopa, Upstart and Perform.
How P2P Lending Works
Peer-to-Peer lending works in an easy-to-understand manner. Prospective lenders sign up with the sites for a variety of reasons. Some sign up as an investment so that they can make a little money on the loans. Some people sign up because they want to do something charitable and give someone else a chance to have something that he or she desires.
Prospective lenders sign up and go through the verification process. Meanwhile, prospective borrowers do the same thing. Many of the P2P lending sites require their prospective borrowers to go through credit checks and identity verification. If they pass the ID verification and have a high enough credit score, they can request funds for a variety of purposes. Many borrowers need loans for large purchases such as homes or car down payments. Some people borrow money to consolidate their debt, as well. Once the Prospects gain access to the site, they have to request the funds and explain why they would like them. Being as detailed as possible helps those prospects to gain the trust of their peers.
Borrowers have two options when it comes to personal loans online. They can borrow according to the rates that are assigned to their credit category risk. The alternative is to auction the loan and see if some of the peers on the site will bid for the rights to issue it. Prospective borrowers may get lucky and have someone bid on the loan for an interest rate that is better than the one that he or she initially thought was available. Once the borrower receives the funds, that person repays the advance as per the agreement that the person has with the peer lender.
The Advantages and Disadvantages of Peer-to-Peer Lending
P2P lending has many benefits for the borrower and the lenders. The borrower has the opportunity to go outside the realm of large banking institutions and deal with people who may care more about the individual’s circumstances and truly want to help. Peer lenders may also give those persons a chance when large institutions would reject the application. Lenders get the opportunity through this type of lending to do something for the member of their communities. They get to directly communicate with borrowers, find out why they desire the loans and then help them if they so desire.
One of the downsides to P2P lending may be that the members have to post their personal financial information out for people to see. Some people are very private about their financial matters, and they don’t want their information exposed. That may be a downside for such people. Another area of concern is the complexity of the auction-based loans. It may consist of a bit more red tape and processes than either the lender or the borrower would like to experience.
Some P2P sites have high credit score qualifications and requirements. They do not consider giving people a second chance and excluding those who have a score of less than 640 in some cases. Therefore, many people can’t get the funding they need.
Lenders don’t have the same protection that big money institutions have when they loan monies to people. Additionally, participants may have to pay administrative fees for their processes, and that can eat into their loans or their profits.
Even though those few questionable factors exist, P2P lending seems to be on the rise not just in the US, but in other locations across the globe. It’s difficult to say what part of the process makes it so favorable, but it’s most likely the humanity of it.