What is peer-to-peer lending?
The advantages of peer-to-peer lending are obvious: P2P platforms allow individual investors to get money directly into businesses that need it. In a traditional bank loan, a bank makes money by spreading out the risk of lending money to individual borrowers. The bank creates the loan (up to a certain limit, usually $250,000 or $1,000,000), and that loan is then given to the borrower. While the bank has to pay the loan back, they do so with interest. A borrower may never see any profit from the loan, or may be stuck with it indefinitely, since the lender typically cannot refinance the loan. The borrower may also not see any return on the loan, either.
How does peer-to-peer lending work?
Here’s how it works: You’re an investor and you have money to lend to individual borrowers. You find lenders on P2P platforms, usually through an online search, or through word of mouth. Those borrowers post documents or their income statements on a P2P platform. Lenders then rate them or “lend” money based on those factors. You get a higher return if you rate borrowers higher than others. That is, you take more risk. Borrowers post documents or their income statements on a P2P platform. Lenders then rate them or “lend” money based on those factors. You get a higher return if you rate borrowers higher than others. That is, you take more risk. Both sides of the loan transaction are recorded on a P2P platform’s user interface.
P2P lending vs. traditional lending
Traditional lending follows the lender’s traditional relationship with a borrower. First, the lender analyzes the borrower’s credit, assets and other financial information to decide if they’re qualified borrowers. If the lender decides the borrower is a suitable candidate, then the lender begins to research the borrower and conducts a formal credit assessment. The lender then submits a loan application with all of the borrower’s financial details, including credit and collateral. Once the lender approves the loan application, the borrower and lender work out a repayment schedule based on agreed upon terms. In traditional lending, the borrower is guaranteed a payment from the lender until the loan is repaid in full.
Peer-to-peer lending risks
The SEC recently gave some new guidelines for P2P loans issued after March 20, 2018. Following the guidelines, there are more detailed regulatory issues to deal with when investing in peer-to-peer loans. The reality of a P2P loan P2P lenders offer their services online in most countries around the world. The services may be linked to your bank account or through online payment gateways. Before you invest in any peer-to-peer loan, there are a few things you need to do before doing so. Check the interest rate – While there are companies that offer loan products at a much lower interest rate, P2P lending has high interest rates, sometimes at around 10% and up. Ensure you understand the risks before investing. Do you have enough collateral?
Peer-to-peer lending best practices
The U.S. Securities and Exchange Commission (SEC) began regulating peer-to-peer lending in 2014, requiring sites like Lending Club and Prosper to register with the agency and comply with its regulations. The SEC took issue with the fact that the online platforms did not vet potential borrowers, including criminal records or outstanding debts, and issued warnings to investors. According to a July 2017 article in Forbes, P2P sites should perform background checks and perform credit checks, which include examining a borrower’s credit history, a borrower’s loan repayments, loan amounts and interest rates to determine if a borrower could repay the loan.
In today’s global market, people are becoming more aware of the advantages that come with adopting an unconventional way of earning a living. P2P lending is one of these unconventional methods which presents itself with some inherent disadvantages as well as some potential advantages. This article is meant to provide readers with information to help them decide whether P2P lending is right for them. It should not be relied on as a substitute for such an investment decision. Stock Media provided by Flickr User Adam Fagen.