Getting a loan is one of the most viable sources of financing when you don’t have enough capital to fund your business. Nowadays, there are many different options you can explore to obtain a loan depending on what you want and how you want it. One of such viable options is Peer to Peer Lending, also known as P2P lending.

Most traditional loan sources such as banks and other financial institutions establish elaborate procedures for giving out loans. For example, you may need to provide valuable collateral and have a solid credit score before you can access some bank loans.

But with Peer to Peer Lending, you can access loans with less stress, better interest rates, and under less strict conditions. Here, you’ll learn how peer-to-peer lending works and all you need to know both as a borrower and an investor.

What is Peer to Peer Lending

Peer to Peer Lending (P2P) is a loan system that lets borrowers get loans directly from individual lenders without having a financial institution as a middleman. It is also known as crowdlending, marketplace lending, or social lending.

P2P lending serves as an alternative to traditional sources of loans such as banks and other financial institutions. For borrowers, it can be a good way to obtain quick loans without going through some rigid protocols established by banks. 

For investors, P2P can provide an opportunity to invest your money and earn more money instead of just leaving them in a savings account. It can also serve as a safer investment alternative to stocks and other volatile investment tools. Let’s consider how the P2P lending system works.

How Does It Work?

Basically, P2P lending works through specialized lending websites. These websites are the platforms that connect potential borrowers with investors who are willing to give out loans. The terms and conditions of the lending may vary from one lending platform to another.

Although the lending websites regulate the P2P transactions in some way, they allow enough flexibility to let you choose what you want. So, there are two principal participants in P2P lending: the borrower and the investor. Let’s see how the system works for both parties.

As a Lender

When you sign up on a P2P lending platform, you have to deposit the money you want to lend into your P2P account. Depending on the lending marketplace, you will have to set up lending parameters such as:

  • The amount of money you want to lend per time.
  • The interest rates you accept for the loans. You can either set a custom rate or choose from the available preset rates.
  • The duration of the loan, usually in years.

These settings help the platform to find and connect you with borrowers whose demands match your conditions. You will start earning interest on the loan as soon as a borrower takes your loan and the money is disbursed from your P2P account.

Many platforms offer different options on what to do with your earnings. You can choose to place the loan repayments on “auto re-lend” to make the money automatically available as it comes in. You can also decide to withdraw your interest earnings and reinvest the capital.

Most of these lender settings can be automated or done manually. While manual setups give you more control each time, automating them saves you time and stress. You get to choose what works best for you anyway.

As a Borrower

To sign up as a borrower on most P2P lending platforms, you may need to provide a valid proof of identity alongside some financial information. This will enable the platform to verify your credit history to assess your credit score.

Your credit score, which is a rating of your creditworthiness, determines factors like how much you can borrow, applicable interest rates, and the repayment structure. Most platforms have a minimum credit score they allow to minimize the risk of default due to inability to repay.

Based on your credit score assessment, the platform offers you loan options that match your application. You can go through the options and choose what is best for you. 

As soon as you receive the loan, the interest begins to count. As you do not have direct access to the lender, you will make repayments through the platform. The platform in turn credits your repayments to the lender.

Note, however, that the P2P lending platform may charge some fees from both the lender and the borrower for their services. So, it is important to find out their fee structure before you choose any lending platform.

Benefits of Peer to Peer Lending

#1. Easy Access To Loans

Most financial institutions may not offer you loans if you do not have high credit scores. Some of them also request collateral before you can access some loans.  But with P2P lending, you can find lenders who are willing to take more risks with you even if it means higher interest rates sometimes.

Also, P2P platforms automate most of the processes. So, it’s possible to set up and verify your profile, apply for a loan and get it disbursed into your account in a matter of minutes.

#2. More Flexible Options

Traditional loan sources such as banks usually have a fixed rate for different kinds of loans. But, you have the liberty to compare different interest rates across lending platforms and choose the one that best suits you. You can also have access to more flexible options such as loan limits, durations, etc.

#3. Higher Returns For Investors

Peer to Peer lending allows you to let your savings earn you more money. So, instead of leaving the money in a savings account for very small interest rates, you can loan them out via P2P lending. And, you get to choose the interest rate you want.

Another way to boost your returns is to explore re-investment options available on the platforms. It’s just like leveraging the power of compound interest where you earn interest on already earned interest.

Drawbacks

#1. Higher Default Rate

Due to less strict rules, there are higher chances of default with P2P lending platforms. This can alter your financial plans if you do not get back your money as at when due.

#2. Lack of Insurance / Protection

Most P2P lending platforms may not be covered by any government insurance policy or protection. So, you may not have legal premises to act when the borrower defaults on the loan agreement.

Some governments also may not permit peer-to-peer lending, making the option unavailable in certain locations.

#3. The Website May Go Down At Any Time

As with most other websites online, the lending platform may go down at any moment. There can also be downtimes due to maintenance and other backed activities.

These downtimes can fall into critical times for you and hamper your investment plans. The website may even crash entirely and you can lose all your money in a twinkle of an eye.

Top Peer to Peer Companies

If you’re looking for a P2P platform where you can lend or borrow from, we’ve got you covered. Here’s a list of some top trusted Peer to Peer lending websites and why you should choose any of them.

  • Peerform: best for you if you’re looking for the best rates.
  • Upstart: best for you if your credit history is limited.
  • Prosper: best option if you have a good credit history.
  • Payoff: best for borrowers with a good credit score.

Conclusion

You can leverage Peer to Peer lending platforms to obtain loans with more user-friendly conditions than traditional sources. Be sure you carefully consider your options before you choose any lending platform. You can contact a financial advisor to guide you for the best decision.

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