Peer-to-peer lending, or P2P lending, is a relatively new way for people to borrow and invest money without involving traditional financial institutions such as banks and credit unions. It has gained popularity in recent years as borrowers and lenders seek to bypass traditional finance institutions for lower interest rates on their loans and a better ROI on their savings.
If you’re looking to turn to peer-to-peer lending platforms for your credit needs or to grow your savings for a better investment, you’ll get the directions you need in this article.
How Peer-to-Peer Lending Works for Borrowers and Investors
P2P lending works in a simple way, more like a typical online marketplace. Borrowers apply for a loan through a P2P lending platform, and investors (the lenders) lend them money, typically in small amounts. The P2P platform serves as an intermediary, handling loan origination, underwriting, and servicing, and charges a fee for its services.
The P2P lending process is faster than the traditional one, as loans can be approved within the same day or, at the latest, a week. The promptness of the loan approval, convenience, and transparency involved are the key things that differentiate peer-to-peer lending from traditional lending.
Though it’s still relatively new, P2P lending offers several benefits to lenders and borrowers, making it the go-to platform for quick loans in recent times.
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Benefits of Peer-to-Peer Lending to Borrowers
P2P lending offers borrowers lots of benefits that traditional financial institutions do not. Here are some of them:
Lower Interest Rates
P2P lenders do not incur the same overhead costs that most traditional lenders are used to. As such, they can afford to offer their loans at lower interest rates than traditional financial institutions.
Furthermore, unlike financial institutions, most lenders lend out their capital, not some deposit from another customer. Therefore, they do not have to calculate interest rate spread to determine their profits.
Flexibility
One key benefit of peer-to-peer lending is its flexibility for borrowers. Borrowers can negotiate the interest rates, loan terms, repayment intervals, and other terms involved in the lending process.
This flexibility in the lending process makes it easy for borrowers to receive loans that meet their needs. Of course, when borrowers get loans that meet their repayment terms, it becomes easier to avoid a debt default.
Quick Approval
Certainly, most borrowers prefer P2P lending to traditional lending because of how easy it makes the lending process. Unlike traditional financial institutions, where a loan can take weeks or even months to be approved, P2P lending platforms approve loans within the same day or, at the latest, the same week.
If you require a loan to sort out an urgent need, you already know traditional financial institutions aren’t going to help. All you need to do is create a P2P lending platform account, provide the required information, and get your loan in a few hours.
Transparency
As a business established on trust first, the P2P lending business requires transparency. That’s why P2P lending platforms make their operations transparent to borrowers and lenders to foster trust among the parties involved.
Borrowers can view the loan details offered to others on the P2P platform and compare them with what’s offered before accepting a loan.
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Benefits of Peer-to-Peer Lending to Investors
The investors (lenders) also benefit significantly from P2P lending in the following ways:
Higher Returns
Lenders can make higher returns by lending their money to borrowers on a P2P lending platform than by keeping their money in a savings account. They have the flexibility to determine the interest rate they want to charge on their loans and the additional fees the borrower can pay in the event of default.
Most P2P lenders charge an interest rate of 7-36%, which is more than the 1-3% people earn from traditional and high-yielding savings accounts.
Investment Diversification
P2P lending serves as an investment diversification option for investors. Instead of having all their money in high-risk assets like stocks, they can put it into short-term lending on P2P platforms.
With the moderate interest rates from P2P lending, investors have a highly liquid investment option that yields a considerable return.
Control over Investments
P2P lenders determine how much interest they want to make, the duration of each loan, and other loan terms. Their control over their investments helps reduce their risk exposure in the lending process.
Transparency
Lenders also benefit from the transparency of the P2P lending process, as they have access to borrower information and clear visibility into loan performance. This also fosters trust among the lenders, enabling them to make more significant investments.
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Is Peer-to-Peer Lending Risky for the Parties Involved?
Like every business, there’s risk involved in peer-to-peer lending. The major risk most P2P lenders face is the risk of default by the borrower. There’s also the risk of early or late repayment, which could affect the lender’s expected profit. When the P2P company folds up, lenders might find it difficult to recoup their investment, as P2P loans are not insured.
The borrower doesn’t have many risks in P2P lending. However, most P2P companies have measures in place to protect the lender. Most companies ensure they vet and approve only borrowers with a good credit score and a certain minimum income level on their website. They also demand collateral, which they use to settle the lender in case the borrower defaults.
Conclusion on Peer-to-Peer Lending
Peer-to-peer lending is an excellent resource for passive income, as it enables you to earn handsomely from funds that would otherwise be lying useless in a savings account. However, like every business and investment, peer-to-peer lending has its drawbacks. Peer-to-peer lending bad credit is the most dreaded experience of every P2P lender, as most times, it’s almost impossible to recover the money lost.
Whether you’re a P2P lender or borrower, I hope this article has given you insights into how peer-to-peer lending works and how you can leverage it to solve your problems.
