Understanding Peer-to-Peer Lending: Pros and Cons

    Many times, we find ourselves in a financial crunch and the only viable solution in such situations is to take a loan. People resort to taking loans from banks and repay them, with interest, after a certain period. However, what do you do when traditional loans are not easily available? That is when peer-to-peer lending comes into the picture. This concept rose to popularity in 2007, when getting a loan from a bank became difficult for borrowers.

    What Is Peer-To-Peer Lending (P2p Lending)?

    In layman’s terms, peer-to-peer lending refers to a process in which you can borrow money from strangers. The lenders and borrowers are brought together on peer-to-peer lending sites. In this process, the lender and borrower can transact freely, without the presence of any intermediary. Lending sites offer both, secured as well as unsecured loans. Usually, the loans available by P2P lending are unsecured in nature. This process is also referred to as marketplace lending, debt crowdfunding, or crowdlending.

    Initially, peer-to-peer lending sites provided only small personal loans. However, over the year’s p2p lending has expanded its horizons to business lending, often in partnership with banks. 

    Process of Peer-To-Peer Lending

    P2P lending is a simple procedure, which is not cumbersome for the lender or the borrower. The entire process takes place online on peer-to-peer lending sites and is pretty much hassle-free. 

    Steps in the peer-to-peer lending process:

    1. The potential borrower is required to file an online application on the p2p lending site.
    2. The peer-to-peer lending site then assesses the application of the borrower and examines his or her credit rating. According to this assessment, an appropriate rate of interest is assigned to the applicant.
    3. Once the application is approved by the site, available options based on his or her credit rating and assigned rate of interest are provided by the investors.
    4. Following this, the applicant can assess all the options at hand and choose something that suits his or her needs.
    5. Usually, the borrower has to pay monthly interests to the lender and the principal amount is to be paid at maturity. A fee is charged from both, the lender as well as the borrower for the services provided by the peer-to-peer lending site.

    What Are The Advantages Of P2p Lending?

    Peer-to-peer lending sites have a host of advantages for both, the lender, as well as the borrower:

    1. Higher returns for the investors: Investors, or the lenders, usually get higher returns in the process of p2p lending as compared to traditional loans or other types of financing.
    2. Easily accessible: As opposed to conventional loans from financial institutions, peer-to-peer lending is more open-source financing.
    3. Lower rates of interest: Peer-to-peer lending usually functions on lower interest rates. This is largely due to rising lender competition.
    4. Hassle-free procedure: The process of application and approval is comparatively faster and easier than it is for traditional loans or other forms of funding. Both lenders and borrowers would have a good experience on the best peer-to-peer lending sites.
    5. Better chances of approval: The criteria for evaluation of your loan application varies from one site to another. So, even if your application is rejected by one site, it may get accepted by other p2p lending sites.

    What Are The Disadvantages Of P2p Lending?

    1. Lack of protection: In the case of peer-to-peer lending, the government does not provide any kind of insurance or security to the lenders if the borrowers default.
    2. Credit Risk: Often, borrowers who opt for peer-to-peer lending, do so because they have low credit ratings and are, therefore, unable to get a traditional loan from the bank. The lenders have to be cautious about such borrowers and the probability of default must be assessed as well.
    3. Lack of legislation: Certain jurisdictions do not permit p2p lending or require the service providers to comply with the investment regulations. As a result, some borrowers and lenders may be unable to use this option.
    4. You will need a good credit rating and security in order to obtain good rates of interest while obtaining a loan in the p2p lending process.
    5. Usually, the amount of loan is lower than the traditional loans that are available from banks or other financial institutions.
    6. If by chance, you miss repayments, it can gravely hurt your credit ratings as well as cost you heavy penalties.

    Why Should You Opt For Peer-To-Peer Lending?

    For many, the process of peer-to-peer lending is much more convenient than obtaining a traditional loan. As the entire process is provided online by the peer-to-peer lending sites, the procedural charges are comparatively less. Moreover, the sites provide competitive rates of interest, thereby giving the borrower a plethora of options to choose from.

    The process of p2p lending is more beneficial for the lenders as well. The possibility of earning higher returns than any other form of investment such as term deposits or bank savings attracts lenders. Moreover, the lenders can avail a safety net by lending to multiple borrowers.

    What’s in it for the borrowers? Easier accessibility, a hassle-free, and speedy application procedure, and competitive rates of interest attract the borrowers. Moreover, p2p lending is a better option for small or new businesses who do not have sufficient cash flow history with lower credit ratings or atypical loan requirements.

    In this entire process, the online peer-to-peer lending site makes its money via the fees paid by the borrowers as well as the lenders.

    Conclusion

    With the increasing popularity of the alternative finance market, p2p lending is becoming the go-to option for most borrowers. While traditional savings accounts struggle to offer good rates of interest, the p2p lending process helps lenders receive higher returns. It is an excellent process to boost your investment portfolio. For borrowers, the entire process is hassle-free and cost-effective. Want a new car or want to renovate your house? Peer-to-peer lending can help you achieve your dreams with offers that are tailor-made to suit your personal needs. Such loans can help you get unsecured loans whenever you find yourself in a financial crisis, even for small amounts. It is advisable to always research and arrive at a p2p lending plan that is genuine and caters to your needs. Repay on time and enjoy the benefits of the peer-to-peer lending process.



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