Person-to-Person Loans: A Growing New Trend

Person-to-person loans have gained popularity within the last few years due to emerging online social networking technologies. Person-to-person loans eliminate the intermediary, or the bank, because the borrower is obtaining financing from a network of individuals online. Person-to-person (P2P) loans offer advantages over the traditional lending structure to both the borrower and investor.

Person-to-Person Lending Platform

The internet has increased person-to-person loans. You can access one of the many person-to-person lending sites to create an account. A borrower will be required to have a credit screening to determine credit worthiness. Once they have entered the system, a borrower can post information about their lending needs. The lending needs can be anything from debt consolidation to paying for an engagement ring.

An investor can search the listings of these borrowers and select which loans they want to fund. Since the borrower’s credit will be available for viewing, the investor can make the determination on how risky an investment they are willing to make on a particular individual.

Advantages

Peer-to-peer loans offer an alternative option for individuals who would not normally be given the opportunity to borrow through a banking institution. The person-to-person loan system establishes an interest rate for the borrower, depending on their credit worthiness. The lower the credit score, the higher the interest rate offered to the borrower.

In turn, the investor who takes on the additional risk of lending to a poor rated borrower, the higher their return will be. The low overheard of running the person-to-person lending platform offers higher rates of return to investors. The savings is also passed on to the borrower. Lower interest rates are offered compared to banks provided the borrower is deemed credit worthy.

Is Person-to-Person Lending Right For You?

As a borrower, you will need to meet certain credit threshold to submit a listing for a loan. You may also need to have some internet marketing expertise to create a listing that intrigues investors. P2P loans are viable options for borrowers that are interested in diversifying their investment.

Person-to-person loans are not FDIC insured, so there is always the risk that you may never see a payment on your investment, in the case of borrower default. One of the draws to the person-to-person lending platform is the human connection and knowing an individual provided money from their own resources. The obligation to repay the debt is stronger than that of owing money to an institutional lender. However, since many person-to-person lending sources are in their infant stage, it is difficult to determine the rate of default as compared to a banking institution.

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