Peer-to-peer lending can be useful in a variety of scenarios where you need to obtain funds quickly. Perhaps you want to pay off or consolidate mortgage purchase a house, initiate a small business fund a marriage ceremony, or replace a broken dishwasher. Perhaps your friends and family are unable to lend you the funds, or you are concerned that financial institutions will reject your loan request. A peer-to-peer (P2P) loan might be the perfect answer for you if you’d like to prevent accruing credit card debt.
But you must understand what peer to peer lending is and how it works? You also need to understand the advantages and disadvantages of peer-to-peer lending and if there are any risks involved. And this is exactly what our article will provide.
WHAT IS PEER-TO-PEER LOANS OR LENDING?
Peer-to-peer lending is a type of direct financing of money to people or organizations that do not include an established financial institution acting as a middleman in the transaction. P2P lending is typically done via internet portals that connect lenders with potential borrowers. Secured and unsecured loans are available through peer-to-peer lending. However, the majority of P2P lending loans are unsecured private loans. Secured loans are uncommon in the sector and are typically supported by luxury items. Peer-to-peer lending is regarded as an alternate source of finance due to some distinguishing qualities. To know more details about peer-to-peer loans you can check out this P2P guide.
HOW DOES PEER-TO-PEER LENDING WORKS?
Peer-to-peer lending is a relatively simple process. All transactions take place on a specific internet site. The following steps explain the general P2P lending procedure:
- A potential borrower who wants to get a loan fills out an online request on the peer-to-peer payment network.
- The platform evaluates the request and calculates the individual’s safety and credit rating. The candidate is then granted a suitable interest rate.
- When the request is successful, the candidate is notified of the viable choices from the investors depending on his credit score and interest payment.
- The candidate can consider the options presented and select one of them.
- The borrower is liable for making periodic (typically monthly) interest payments as well as returning the principal amount when the loan matures.
And this is how it’s done. Also, note that the organization that runs the internet platform collects a commission for each service it provides to both borrowers and investors.
PROS OF PEER-TO-PEER LOANS:
When comparing to credit cards or conventional bank loans, this online borrowing alternative has several advantages:
- The online application process is simple and quick.
- Reviewing your interest rate does not affect your credit rating.
- Interest rates are much lower when comparing to some credit and debit cards and conventional banking firms.
- Fixed interest rates and monthly instalments with no extra charges
- Your lenders will not approach you directly so that you will stay anonymous to them.
- There is no prepayment penalty if you pay back the lender before the given deadline.
- Because loans are unsecured, you are not required to furnish collateral such as the ownership of your automobile.
- There is a social component because you can “watch” electronically as investors finance your loan up to its maximum amount.
- If you manage your initial loan appropriately, you can request further online loans.
CONS OF PEER-TO-PEER LOANS:
Even though P2P networks promote numerous advantages on their internet sites, there are some drawbacks and risk of P2P lending to be mindful of before you decide to borrow:
- It is not always possible to borrow your path out of debt: According to investing and chartered financial analyst Joseph Hogue, the most common type of P2P loan is debt management financing, but even this alternate financing might reverse if you don’t address the budget problem that got you in trouble in the first place. “If you consistently waste more than you make, you will never be able to get out of debt,” stated Hogue.
- High-interest rates are in effect. If your credit is less than outstanding, you will be saddled with a high-interest rate, which will cost you more in the coming years. It may be preferable to postpone and enhance your credit before applying.
- Borrowers with a poor credit history may be out of luck. Credit scores that fall underneath the cut-off points are rarely granted. Borrowers at the low end of the range will face rates ranging from 25 to 35 per cent. That isn’t any better — and may even be worse — than the interest rates on credit and debit cards for folks with poor credit.
- If you do not effectively manage your P2P loans, you will face serious penalties. Don’t assume that just because a loan is unsecured means it doesn’t have to be paid back. Late payment will have the same negative impact on your credit rating as every other sort of loan. Furthermore, many P2P lenders will not lend to someone who has missed a payment, so you may be jeopardising your likelihood of acquiring future loans.
People with great credit may find that peer-to-peer lending provides an important possibility: Borrowers can quickly get financed with little effort, and potentially at a cheaper cost than using credit and debit cards. Personal lenders can diversify their assets and maybe lessen their total risk by include P2P loans in their portfolio. In either scenario, you should carefully weigh the benefits and drawbacks of peer-to-peer lending before making a financial commitment.