What is peer-to-peer (P2P)
6 Min Read
Peer-to-peer lending connects borrowers to a network of investors. When you apply for a loan, investors will determine whether or not to fund your loan on an individual level. Typically, peer-to-peer lender requirements are more relaxed than those set by traditional financial institutions.
Let’s answer the question of what is peer-to-peer lending and explore what to know before moving forward.
- What is peer-to-peer lending? Definition
- How does peer-to-peer lending work?
- What can I use a P2P loan for?
- What fees do peer-to-peer lenders charge?
- Where can you get a P2P loan?
- How to apply for a peer-to-peer loan
- How does it work if I want to lend money?
- What are the benefits and drawbacks of peer-to-peer lending?
- Is peer-to-peer lending safe?
- The bottom line on peer-to-peer lending
What is peer-to-peer lending? Definition
Peer-to-peer lending goes by many names. Other names you might come across include social lending, crowd lending, marketplace lending, and P2P lending.
Regardless of the name, the premise is the same. Individual borrowers submit applications to a peer-to-peer platform. From there, individual investors have the choice to fund loans or not. If funded, borrowers receive the funds upfront, like a traditional personal loan.
Borrowers tend to benefit from P2P lending options because these loans represent an alternative to traditional lending solutions. For example, borrowers might apply for a peer-to-peer loan after being denied a traditional personal loan from other financial institutions. Some borrowers can still find attractive interest rates, making P2P loans viable alternatives to payday loans or credit cards.
From the lender’s perspective, P2P loans tend to come with a higher interest rate than they could get through a traditional savings account.
How does peer-to-peer lending work?
Peer-to-peer loans are available on a variety of online platforms. Although the features of each platform vary, the basic process is the same.
Individuals looking to borrow money will fill out a straightforward application on a peer-to-peer lending platform. The lending platforms will provide the borrower’s application information to potential investors. Investors can review the application and choose to fund all or part of the loan.
If approved, the borrower will get a lump sum deposit upfront. The final step is to repay the loan in regular monthly loan payments for the duration of the loan term.
Of course, the goal for investors is to recoup the loan principal plus interest. However, the investor might lose funds if the borrower defaults on the loan.
What can I use a P2P loan for?
In most cases, peer-to-peer lenders provide access to unsecured personal loans. As with other kinds of unsecured loans, you can use the funds for almost any reason you see fit. However, some peer-to-peer lending platforms will ask you to provide your intended use of the funds upfront.
Some popular reasons to take out a loan include funding a home renovation, covering medical expenses, consolidating debt, and paying for a big purchase. Sometimes, small business owners will tap into P2P lending to obtain small business loans. When applying for a loan, make sure to read the fine print. Many lending platforms don’t allow borrowers to use the funds for some specific purposes, such as gambling or illegal ventures.
What fees do peer-to-peer lenders charge?
Peer-to-peer lending platforms connect investors and borrowers. Thus, both sides that participate in the process will be charged.
As a borrower, you’ll have to pay origination fees. Additionally, if you make your monthly payment late, a lender may charge a late fee. P2P lending also comes with costs for investors. They include potential administrative fees.
Whether you want to borrow money or lend money, read the fine print before signing on the dotted line. It’s essential to be aware of the fees before they hit your account.
Where can you get a P2P loan?
P2P loans are available through various peer-to-peer lending platforms. Prosper is one of the most popular of them but not the only one. If you are looking for a loan, take the time to shop around to find the best interest rates for your situation.
How to apply for a peer-to-peer loan
If you want to apply for a peer-to-peer loan, here are the steps for borrowers:
- Fill out an application: Like other types of loans, you should be prepared to provide information about your credit history, income, and current debts.
- Know your interest rate: Most lending platforms have transparent terms and display an interest rate before you borrow. You can decide if you want to move forward based on the costs.
- Wait: If you choose to move forward, individual investors will review the loan. Like a traditional financial institution, the investor may or may not approve the loan.
- Accept the funds: If approved, the funds will hit your bank account. You can use them as you see fit.
- Repay the loan: Last but not least, you’ll need to start making regular payments to repay the loan.
How does it work if I want to lend money?
Individual can not only borrow money through P2P platforms but also become investors and give peer-to-peer loans to other people. To get started, you need to choose a suitable P2P lending platform and create an account on it.
After that, you will be able to review available loan requests. Once you decide to approve the loan, you need to provide an individual with the requested amount. Then, you can enjoy watching the monthly payments roll into your account.
What are the benefits and drawbacks of peer-to-peer lending?
Just like any other borrowing option, peer-to-peer lending has its pros and cons. The following features relevant to peer-to-peer lending.
- Relaxes borrower requirements: Unlike a credit union or bank, individual investors don’t use credit bureaus to determine whether or not to give you a loan. This means that borrowers with less-than-ideal credit scores can receive the money they need.
- Fast funding: P2P loans come with a fast and convenient online application process. There’s no paperwork required.
- Higher interest rates: In some cases, borrowers will find higher interest rates through peer-to-peer loans than other lending solutions.
- Risk for investors: You can’t be 100% sure that a borrower will repay their loan. Thus, investors take on some risks and should be cautious when approving loan requests.
Is peer-to-peer lending safe?
As a borrower, you can consider peer-to-peer loans to be just as safe as regular personal loans. At the same time, investors take on risks of non getting their money back when they give a P2P loan.
At first glance, investors expect to get returns on their investments in the form of additional interest rates. However, there’s always a probability that a borrower will default on the loan. In that case, you might not only miss a profit but also lose money.
Alternative funding solutions
If you need access to funds, peer-to-peer loans aren’t the only option. Here are a few alternatives:
- Traditional personal loans: Personal loans tend to come with fixed interest rates without any collateral requirement.
- Credit cards: Credit cards aren’t an ideal funding source. But if you can find a reasonable interest rate, the right credit card could present the solution you need.
The bottom line on peer-to-peer lending
Peer-to-peer lending is a solution for borrowers looking for fast funding. Before jumping into a loan, run the numbers to ensure the maths works for your budget.
As an investor, approach P2P loans with an awareness of the risk involved. It’s possible to lose money on your investment, consider that risk before moving forward.
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