Are you in need of cash but not quite sure if you can get a loan with your local lender? Maybe you should try an online peer-to-peer lending.
If you want a personal or a business loan, you’re no longer only limited to the local bank. The bank process can be pervasive with invasive financial checks on the applicant’s credit history to determine if you qualify to get a loan. If you’re lucky to get approved, the lenders use your credit report to identify a suitable interest rate to charge on loan.
If you want to obtain better interest rates or if your lender rejects your loan application because of poor credit history, you can now opt for an alternative way of borrowing funds which is an online peer-to-peer form of lending. To better understand this form of loans, this article will try to answer a few commonly asked questions.
What is Peer-To-Peer Lending?
The online Peer-to-peer (P2P) form of lending is a social lending method or crowdlending technique of financing debts that allows persons to borrow and lend funds with no need to follow the conventional methods that regular financial institution use. Peer-to-peer lending is a secure online process but involves more time, effort and risk than the usual brick-and-mortar lending institutions. It, however, helps minimize the inefficiencies of traditional lending institutions, and so online peer-to-peer lending offers lower rates to borrowers and high but non-volatile returns to investors.
The peer-to-peer lending platforms offer personal unsecured loans to individuals and owners of small businesses that are looking to obtain payday loans, student loans, commercial and real estate loans among others. The lenders that choose to offer secured loans, on the other hand, take luxurious assets such as jewelry, antiques, watches, and fine art as the collateral since it is possible to default just like with traditional lending.
Since any government guarantee does not secure investment in a peer loan, investors can pick the borrower to give funds to and enjoy the benefit of having your money diversified among different borrowers.
What are the main characteristics of the peer-to-peer form of lending?
Peer-to-peer lending is an alternative financial facility. Here are the typical characteristics of the peer-to-peer form of loan:
- It is sometimes conducted to gain profits.
- Lenders have the option to pick the borrowers to invest their funds in if the P2P platform provides that facility.
- No mandatory common bond or prior connection between lenders and borrowers.
- Peer-To-Peer companies offer the channel of intermediation.
- The transactions take place online.
- The peer-to-peer loans can either be secured or unsecured, and they do not have any protection from the state though there can be protection funds.
How does the online Peer-To-Peer lending work?
Peer to peer lending (P2P) platforms are networks that join borrowers and willing investors who offer the borrower funds at the desirable interest rates. The money lenders generate a source income from the interest rates which can often exceed the earnings from the interest rates amounts of other types of investments like savings investments, such as CDs, savings accounts and the securities.
Borrowers’ on the flip side can obtain financing for loan applications that a local financial institution could have turned down. Moreover, they also acquire a satisfactory interest on loans than the one they would have otherwise obtained from a local lender.
In the peer-to-peer form of lending, the borrowers get loans from specific willing investors who want to lend their funds for an interest rate you specify. The platform displays the borrowers’ profile on an online peer-to-peer platform where the investors can evaluate it to determine if they would want to lend their money to such a borrower.
If lucky, the borrower can get the entire loan amount of what he had applied for from the money lender. If the borrower is not fortunate, he gets only a portion of what he had requested for, and one or several investors may finance the remaining part of the loan in the peer-to-peer lending platform. So, typically, a peer-to-peer form of lending offers the borrower multiple sources of credit, and they make monthly repayment to each of the separate sources.
Some for-profit companies can act as a peer-to-peer lending intermediary. They provide a platform that joins up borrowers and the willing lenders. If you need personal funds or financing commercial ventures, you need to apply with such intermediaries. They will evaluate their risk, define a credit rating, and device a proper interest rate to their profiles. Borrowers make monthly repayments of the loan acquired through the P2P companies’ that processes the loan. Then, they forward the money to the investors who had lent it.
What are the peer-to-peer intermediaries’ services?
- The online investment platform allows borrowers to draw lenders and investors who identify and purchase loans to meet their investment criteria.
- Help develop suitable credit models for loan approvals and pricing.
- Assist in the verification of the borrowers’ identity, bank statements, employment, and income sources.
- Perform intensive borrower credit checks and filters out the unqualified borrowers.
- Process the loan repayments from the borrowers and then forwards them to the lenders who had invested in the loan.
- Services the loans and provides customer support to a borrower.
- Attempt fees collection from the delinquent borrowers or defaulters.
- Perform legal compliance and reporting.
- Find new investors or lenders and borrowers.
How do you invest through a peer to peer lending company?
An investor first establishes an account with a peer to peer lending company such as Lending Club or Prosper. The investor then transfers their capital to their account and directs the investment capital into portions of loans available on the platform. A majority of investors have found this to be a reliable technique to see a better yield in a low-interest rate environment.
If an investor decides to utilize a third-party investment manager like the NSR Invest, they can have the entire process handled by experts from the beginning to the end. Most peer-to-peer lending companies utilize the use of technology and algorithms to allow the investors to finance the loans efficiently.
Is Peer to Peer Lending a Safe Way to Invest?
The online P2P lending is a safe and secure process. However, peer to peer form of credit includes a considerable quantity of risk such as default risk as it is with any other kind of loan. The ideal way to alleviate this kind of risk is through carrying out thorough research on the credit interest rates that are allocated by the P2P lenders and also diversify the investment across multiple borrowers.
You can be able to bid with as a few dollars like $50. P2P lending is thus an effortless way to invest your funds in diversified investments. If you lend through a reliable company like Prosper or Lending Club, then you will be assuming a similar amount of risk a local lender would, just on a smaller scale.
Who Benefits from a P2P form of Lending?
Both borrowers and the investors benefit from P2P lending so long as the process goes as deemed. Borrowers benefit because they can easily obtain a loan which is often at a lower rate than they would have been able to receive from a local lender. Since there are fewer overhead costs associated with this type of credit, loans are advanced at lower interest rates.
Lenders also benefit since they will often receive higher returns on their money than had they placed their funds into a savings account like a fixed deposit or a CD. Lenders exact results may vary and can go up to of 9-12%. Peer to peer lending companies also benefits because they take a small percentage of the originating loan cost.
What are the advantages and criticisms of a peer-to-peer form of lending?
- Interest Rates
A significant benefit of peer-to-peer lending for borrowers is that P2P form of loan can sometimes offer better interest rates than the conventional rates by other lenders and bank. The lenders can obtain higher returns than from different types of investments like securities, CDs, though also exposed to a substantial risk of getting lost. The rates of interests may also attract lower fluctuations and volatility compared to different types of investments.
- Socially-conscious Venture
It offers the investors who are concerned about doing socially conscious investing an ideal platform since it gives them the ability to support the efforts of different individuals. It gives them a chance to get a better rate on their debts, help individuals who are involved in activities and occupations that are considered socially moral and promising to the community, and turn down investments to individuals employed in the industries that are considered socially immoral or hazardous to the society at large.
- Credit Risk
A peer-to-peer form of lending also appeals to borrowers who are not qualified for traditional bank loans because of their poor credit status or lack of credit history. However, since past performance is an indication of impending performance, credit scores that are low associated with a higher likelihood of default and so peer-to-peer mediators have begun to turn down a vast number of loan applicants who have a history of negligence and also they now impose higher rates to approved borrowers who seem riskier. Some stockbrokers are also introducing funds where every individual borrower has to make a contribution and lenders can now get compensated if a borrower defaults.
- Government Protection
Unlike banks depositors, a peer-to-peer form of lending gives the lenders the option to choose if they want to invest their funds to borrowers with a lower risk of defaults but lower interest rates or to borrowers with higher risk and subsequent returns. Peer-to-peer kind of lending is a sound investment in the US, and the federal government does not guarantee the repayments in the event a borrower defaults the US Federal Deposit Insurance Company insures the way bank deposits.
Bottom Line
A peer-to-peer form of lending has created an alternative avenue for borrowers who could not access funding from banks to receive loans and for individual people to invest their funds and generate an extra source of income.