Peer-to-peer (P2P) lending is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. Peer-to-peer lending works differently than getting a loan from a bank or finance companies. When you get a loan from the bank, the bank will use some of its assets, which are the deposits made into accounts by other customers, to fund the loan. With peer-to-peer lending, borrowers are matched directly with lenders through a lending platform. Lenders get to see and select exactly which loans they want to fund.
Traditionally, individuals and small businesses who want a loan usually apply for one through the bank. The bank would run extensive financial checks on the applicant’s credit history to determine if the entity would qualify for a loan and if yes, determines the interest rate that will be charged on the loan. Individuals that want to avoid being charged high interest rates or that would otherwise be rejected for a loan application due to not being able to present the guarantees banks are asking for, may opt for an alternative way of borrowing funds – peer-to-peer lending.
With peer-to-peer lending, borrowers take loans from individual investors who are willing to lend their own money for an agreed interest rate. The profile of a borrower is usually displayed on a peer-to-peer online platform where investors can assess these profiles to determine whether they would want to risk lending money to a borrower. A borrower might receive the full loan amount or only a portion of what he asked for from an investor. In the case of the latter, the remaining portion of the loan may be funded by one or more investors in the peer lending marketplace. In peer-to-peer lending, a loan may have multiple sources and monthly repayment has to be made to each of the individual sources. P2P platforms connect borrowers to investors with attractive interest rates. For lenders, the loans generate income in the form of interest which can often exceed the interest amount that can be earned through savings vehicles, such as saving accounts and CDs. On the other hand, P2P loans give borrowers access to financing that they may not have gotten approval for from standard financial intermediaries. Furthermore, a borrower gets a more favorable interest rate on their loans than one they would otherwise have gotten from traditional lenders. There are many types of peer to peer lending like:
In general, these are smaller loans which people use to pay for medical expenses, credit card consolidation, etc. Most people who take out such a loan have good credit scores and are very likely to pay the money back on time.
Almost everyone who wants to start or further invest in their business needs a loan at some point. Recently, many business owners have opted for P2P loans, which they usually can get within a week.
The real estate loan market has long been dominated by banks and has created a huge amount of debt in the banking system. For this reason, people are increasingly turning to P2P lending. These lending websites require much simpler and less time-consuming procedures compared to banks. Apart from mortgages, borrowers apply for bridge loans and construction loans.