Understanding Peer-to-Peer (P2P) Lending

Peer-to-peer lending(P2P), also referred to as crowdlending or social lending, is a form of lending that makes it possible for persons to directly obtain loans from other persons, thus eliminating financial institutions as middlemen. Over the past few years, websites enabling P2P lending have increased significantly, offering it as a substitute financing method. P2P lending provides both unsecured and secured loans. Nonetheless, a majority of P2P loans are personal loans that aren’t secured. It is on rare occasions that you’ll find secured P2P loans, and when offered, they are typically supported by luxury goods. P2P lending has some exceptional characteristics that make it seem like an alternate way of financing. If you want to get financial assistance, you can always use review sites such as Britainreviews.co.uk to look at top finance companies UK reviews. Avoid finance companies that have negative reviews, and this way, you’ll get reputable finance companies.

How peer-to-peer lending works

P2P lending has a reasonably straightforward process. It involves an online platform that’s specialised and where all transactions are carried out. The general stepwise process is as below

  1. A potential borrower who wants a loan performs an online application on a P2P lending platform.
  2. The platform determines the credit and risk score of the applicant after evaluating their applications, and then a reasonable interest rate is then allocated to the applicant.
  3. On approval of the application, the applicants then receive the options that are available from the investors based his assigned rates of interest and credit rating
  4. The applicant can assess the options proposed and selects one of them.
  5. The applicant is then required to pay periodic, normally monthly interest payments and at maturity should repay the principal amount.

Both the investors and the borrowers pay some fee to the company that’s maintaining the online platform for the services that it provides through the platform.

The pros and cons of peer-to-peer lending

The pros

  1. Lower rates of interests: Generally, because of the lower origination fee and competition between lenders, P2P loans are accompanied by lower interest rates.
  2. Investors get higher returns: As compared to other investments, P2P lending offers investors high returns.
  3. It’s a source of funding that is more accessible: Borrowers will find P2P lending to be more accessible than the conventional loans offered by financial institutions

The cons of P2P lending include

  1. No government protection or insurance: If a borrower defaults, the government doesn’t provide any security such as insurance to the lenders.
  2. Credit risk: P2P loans are prone to greater credit risks. A majority of borrowers that apply for P2P loans have low credit ratings that prevent them from getting a loan from conventional banks. Thus, a lender should be alert that the borrower has a high risk of defaulting.
  3. Legislation: Certain jurisdictions do not permit P2P lending or will necessitate companies offering the services to be compliant with investment regulations. Thus, you may find that P2P isn’t accessible in some areas.

The evolution of P2P

At the start, P2P lending was viewed as a way of providing credit access to persons that conventional institutions rejected or as a method of consolidating student loan debt at more favourable interest rates. However, in recent times, P2P lending sites have extended their scope. A majority of them now aim at clients who want to pay their credit card debt at low rates of interest. P2P lending sites are also offering auto financing and home improvement loans. When a borrower has good credit, P2P sites provide rates of interest that are lesser as compared to those of banks. On the other hand, applicants with bad credit scores are offered higher interest rates.

Special considerations you should make regarding P2P lending

Always make sure you take the following precautions before getting a P2P loan

  1. Examine your spending and income
  2. Shop around for the various options available
  3. Have a look at your credit and check for any inconsistencies. Keep in mind that errors that may be available on your credit reports can have the effect of decreasing your credit score
  4. Assess your budget to know what is affordable for you to pay and the amount you require to borrow.

In conclusion, from the paper, you can understand that P2P lending is an option of financing that makes it possible for individual investors to provide loans to persons looking for auto, personal, business, among other loan types. This article has gone further to explore the topic to help the reader have a better understanding of Peer-to-peer lending(P2P).