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What is Peer to Peer Lending?

• Posted on December 24, 2019
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What is Peer to Peer Lending?

Introduction

When it comes to lending loans, many individuals and institutions provide moneylending services. These include Banks, finance companies, money lenders and peer to peer lending systems. Though each one has different policies and methods of providing loans (lending money), the goal is the same. To earn profits out of rates of interest and thus generating revenue in the market.

Definition and Basic understanding

Peer to peer lending is one such system of providing loans. By simple definition, Peer to peer lending which is also abbreviated as P2P lending is the practice of lending money to individuals or businesses through online services that connect lenders with borrowers.

This method has greatly increased its usage as an alternative method of financing. P2P lending is also sometimes commonly referred to as Marketplace lending as usually the middleman who operates between the lenders and the borrowers which are the website that facilitates this, form the online market.

This method of lending enables the individuals to obtain loans directly from other individuals, which in process, rules out the financial institutions as the middlemen. Although this concept took birth in 2005, but the websites that operate under this lending system have already increased in number and some of the prominent lending websites include:

• www.prosper.com
• www.lendingclub.com
• www.peerform.com
• www.upstart.com
• www.streetshares.com

To know more about which peer to peer lending website is the best for you, click to read quick reviews based on personal experiences on Bankquality.com and help yourself choose the best!

How Peer to Peer lending works

As already mentioned, P2P websites directly connect borrowers with lenders. It is often a pre-requisite that the lenders have to show a proof of their creditworthiness – their credit and civil scores – the sites set the terms and the rates before enabling the transaction. The rates of interest are based on the creditworthiness of the borrower.

For your convenience, we have enlisted points to help you better understand the process behind marketplace lending:

• First, the Investor opens an account on the site and deposits a sum of money which is to be dispersed as loans.
• Second, the loan applicant posts a financial profile and is assigned a risk category by the site which determines the rate of interest the applicant can pay.
• Different offers depending on the different risk categories are posted by the websites. The applicant reviews and accepts one.
• The process is either entirely automated or can be done manually.

There are different websites which specialize in particular types of borrowers. 'Streetshares' is designed for small businesses.

Advantages of P2P lending for Individuals

• Investors like knowing who they are giving money to and the reason behind the borrowing which is often seen as a factor for checking the credentials of the borrower. This not only gives them personal satisfaction but also allows them to choose borrowers who they believe will repay the loan in full on time.
• P2P offers a potentially filled platform for those who dislike banks and prefer other ways of financing funds.
• For the Investors, this platform becomes an advantage as they can enjoy a higher percentage of interest rates than compared to a cash deposit in a bank.
• By joining a P2P lending site, the individual becomes a part of a community form, where there are regular updates on all information about lending and borrowing experience.

Disadvantages of P2P Lending

• Quite naturally, the downsides to this transaction are that many borrowers are excluded as they do not have a good credit score.
• Compared to taking loans from a bank or a credit union, P2P lending processes take much longer time and work. The loan selection and crediting process demands a level of financial sophistication many people do not possess.
• P2P loans usually come with low-interest rates as there is a lot of competition between lenders with lower origination fees.
• Files and folders maintained by websites regarding the lending information and process cannot be certainly backed up. There’s a high risk of losing borrower data.

Conclusion

With the growing trend of diverse alternatives to ways of financing, P2p lending has gained a lot of attention both from the sides of the borrower and the lenders, more private individuals are participating in this mode of transaction by considering this a profitable investment. Borrowers are attracted as they find this transaction more interesting and somewhat easy. Bankquality.com recognizes the Peer to peer lending platform and encourages our readers if interested to be informed about this and make the right choice before engaging in any mode of financing. Register Now on our website to join our global community and get regular updates on the latest topics. Bankquality.com keeps you informed!