In the face of economic uncertainty, accessing personal loans can make or break one’s financial and psychological stability. One source of financing that has grown in popularity is peer-to-peer (P2P) lending. What is it, and how can you benefit from it?
What is Peer-to-peer lending?
P2P lending is an alternative source of financing that enables individuals or businesses to obtain secured or unsecured loans from other individuals without the participation of any financial institution as an intermediary. This type of lending is generally done through an online platform that matches lenders to prospective borrowers. P2P lending started in 2005 and is also known as “social lending” or “crowdlending.”
Types of P2P lenders
Some P2P lenders specialize in the type of borrowers. Some focus on lending money to small businesses only, while others are professional service providers such as doctors who lend money to their patients.
P2P lending has also expanded its market. They already cater to loans for credit card debt payment, debt consolidation, home improvement, student, insurance, car financing, major purchase, vacation, wedding expenses, home buying, medical expenses, moving, and relocation.
How P2P lending works?
Today, many P2P lenders now exist. What’s better is that they can be accessed through their respective platforms (websites or mobile apps). Every P2P lender has their own interest rates based on the borrower’s creditworthiness. Here’s how P2P lending works.
- Open an account with your desired platform and deposit a sum of money to be invested. Afterward, you can now start lending offers to prospective borrowers.
- Before you can do that, you need to choose how long you wish your money should be returned. As a rule of thumb, the longer you invest your money, the higher the potential return.
- After your money has been transferred to your P2P account, you can now start lending it out in two ways: One, through automated lending, offers to be performed by the platform. The platform will make the lending offer to borrowers on your behalf based on the loan terms that you wanted. Two, making the offer manually through the platform. While manually managing your account, you have total control, but this is also time-consuming, unlike the automatic system offer by the platform.
- Once a match and disbursement of a loan have been completed, you can now start earning through the interest. Regarding your earnings, there are options provided by the management: automatic re-lending, weekly or monthly withdrawals, full or partial.
- Visit the platform and choose what type of loan you will be availing. Fill up a quote request. Personal profile and proof of identity will e asked. The accomplished application will be assessed thoroughly, and an in-depth credit check will be performed.
- If you pass the creditworthiness check, you will be provided by a provisional annual percentage rate, as wells as the amount, monthly cost, duration, and total amount payable. You can accept or decline the offer.
- If you accept the terms of the loan, you will be matched with a lender/s that suit the quote you provided. Money transfer and regular payment will be processed on the platform.
Advantages of P2P lending
The following are the primary advantages of P2P lending to borrowers and lenders:
- Faster returns to the investors: Because of the loan nature where it does not involve a considerable amount of money, the rate of return of the investment is faster compared to other types of investment.
- Higher returns to the investors: Compared to traditional savings accounts, investors could earn much higher by investing in P2P.
- Risk diversification. Lesser risk for investors losing their money as they can lend their investment to multiple borrowers.
- More accessible source of funding. For borrowers, P2P lending is more accessible than traditional loans from financial institutions.
- Lower interest rates: In P2P, interest rates are lower compared to other lending schemes.
Disadvantages of P2P lending
- High Credit risk: Many borrowers possess low credit ratings resulting in high default probability.
- No Insurance/Protection: Since the government’s Financial Services Compensation Scheme does not cover P2Ps, there is no guarantee and insurance for investors not to lose their investment from the platform.
- Not tax-free. Every earning from the interest of your investment is taxable.
P2P lending is an alternative source of financing that connects the borrowers directly to lenders through an online platform. This type of funding offers wide accessibility to different kinds of personal loans for borrowers and additional income for investors. However, its lack of protection and high credit risks are things to watch out for.