Peer-to-Peer Loan

Applying to a bank or other financial institution for a loan can be a poor option for some borrowers. Their credit scores may be insufficient to be approved by the bank. Additionally, they may have a credit history that is too short, and banks will not want to take risks. Some may need a loan urgently, and the approval procedure at a financial institution is too long. In this case, peer-to-peer (P2P) lending comes to the rescue. It differs from the traditional approach in that the lenders are ordinary people who are ready to provide borrowers with their money at interest.

Features of Peer-to-Peer Lending

Individuals carry out P2P lending on special online platforms, which play the role of intermediaries in the deal. Also, lenders or those who frequently borrow money can install special apps on their phones. Those apps act as meeting points between those willing to provide their money and those who need it.

The Role of P2P Platforms

Online platforms provide a convenient digital infrastructure for selecting loan providers and completing transactions. They check borrowers’ ratings at the credit bureau and facilitate signing the agreement between the borrower and lender. In fact, they act as guarantors of the deal’s transparency and, therefore, charge commissions for their services.

Secured and Unsecured Loans

Peer-to-peer loans are usually unsecured, i.e., lenders do not require collateral from borrowers. If the debtor defaults on the loan, no property can be alienated from them. Secured loans are also possible, although less common. Any valuables, such as jewelry, antiques, etc., can be used as collateral.

Diversification of Risks

Since lenders risk more in the absence of collateral, providing large loans is not profitable for them. In this case, failure to repay the debt will result in serious losses. To diversify risks, they prefer to divide the same large amount into many parts and lend those parts to different borrowers. If one or two of them do not repay the debt, this will not greatly affect the lenders’ fortune. Therefore, it is not uncommon for several lenders to finance one large loan at the same time. In this case, the borrower receives the money they need, and lenders risk only a small amount of their capital.

The Application Process

One of the main advantages of P2P loans is their high receipt speed. Lenders quickly review applications and make decisions. Moreover, they even compete with each other for borrowers since this is an opportunity to earn money on interest. In addition, all operations are carried out online, while some banks still prefer in-person applications.

P2P lending is an opportunity to quickly find a small loan and a great chance to get a passive income. If you are willing to risk your money and lend it to other people, you can earn a good income from interest.