Finance

Simple Guide On Peer To Peer Lending

Peer to peer lending also known as social lending is a form of debt financing that involves borrowing money from an individual without the use of a financial intermediary such as banks. It is a growing industry globally where borrowers can access these services even online. Peer to peer lending would be the better option for someone who does not qualify for a loan from other financial institutions or one that has been turned down for one reason or another.

How does it work?

The lenders provide small loans directly to customers. Borrowers pay less interest than they would if they had borrowed from banks while lenders get higher returns than they would if they put their money in saving accounts or government bonds. These loans are unsecured which means that there is no collateral involved.

What are the advantages of peer to peer lending?

These services have advantages to both lenders and borrowers. To the lenders the loans earn them income in form of interest which most of the time exceeds the interest earned by putting their money in saving accounts.

To the borrowers these services give them access to financial help that they may not have gotten approval for by other financial institutions. They also get easier approval from these services than would be the case if they were dealing with traditional lenders such as banks.

Peer to peer lending also saves you the charges you would pay if you were getting financing from a bank e.g. application fee, processing fee among others. It also saves time since most of the time you get the money the same day or a few days after application as compared to other financial institutions where a loan takes even weeks to be approved.

What are the disadvantages?

Peer to peer lending however has its own disadvantages. To the lender you have no assurance that the borrower who may have been rejected by the other financing institutions will pay back the money. They may have been rejected due to their high likelihood to default.

The amount you seek in peer to peer loans may not be provided fully. If there are no enough people to invest in your loan then you may not acquire the whole amount. It is also not regulated form of lending and therefore there are many risks involved.

If you need to obtain this kind of loan make sure you understand how it works and the terms and conditions. This kind of loan does not enjoy the protection of FDIC as is the case with bank loans and therefore lenders run the risk of losing the money if the borrower defaults.

It is also impossible to recover losses since these loans do not involve collateral.

If you decide to go for these peer to peer lending services , cross check the terms of the loan since sometimes the interests may exceed those of commercial banks. This is because the high risk factor has to be considered in the interest rates. Peer to peer lending is however a good source of financing if you don’t qualify for other loans.

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