Peer to peer lending which is often abbreviated as P2P lending, is a money lending practice to certain individuals or any businesses through services that is online and often matches the lenders to the borrowers. These companies usually offer their services online and try to work with a lower overhead expense. This can enable them to provide their services comparatively at a cheaper rate than traditional financial businesses and institutions.
Due to this, the lenders can earn higher returns than the investors or the investment products offered by any government-run banks, while the borrowers can borrow the money at a lower interest rate. It is a win-win situation.
Peer to peer lending enables individuals to get a loan directly from any other lender. That will cut out the middleman that is the various financial institutions. Peer to peer lending has become greatly popular and adopted as an alternative method for financing. It is also known as crowdlending or social lending.
Understanding about the Peer to Peer lending :
To understand peer to peer lending, we know that the borrowers are directly connected to the lenders via a website instead of a financial institution. Each website dictates the terms and conditions and the rates and then enables the transaction. There is a wide range of interest rates. However, it ultimately depends on the credit scores and worth of the borrower.
In this process, first, an investor will have to open an account in their name on the site and deposit a certain amount of money that would be dispersed in the name of loans. Then, the applicant who is the borrower will post their profile stating the financials in their profile that is assigned a risk category. This determines the interest that any applicant who will borrow the money will have to pay. Then the borrower may review the offers and accept anyone. The loan applicants may also break up their requests into many requests and accept multiple offers. The entire transaction, from money transfer to monthly payments are all done via the website.
Most of the peer to peer loans are unsecured personal loans that are lent. There are lenders that lend huge amounts of money to businesses. There are various ways to offer a secured loan. It is often by using luxury assets such as aircraft, watches, fine art, building, cars, jewelry, and many more of the business assets available. These act as collateral. These are made to either an individual, or a lending and investing firm, or a charity. Student loans, commercial as well as real estate loans, payday loans, and even secured business loans, leasing, and factoring are all various forms of peer to peer lending.
Comparing the Stock Market:
If you are to compare the stock market to peer lending, the latter tends to have less liquidity as well as less volatility. The lending intercessors are completely for-profit businesses. These intermediaries generate revenue by collecting a one time fee on funded loans offered, from the borrowers. By applying a loan funding fee to the lenders or borrowers, it can be a fixed amount annually or a certain amount of percentage of the entire loan amount.
