There has been a lot said about peer to peer (P2P) lending lately. With the economy and credit market crunch making it difficult to get more traditional loans, “alternative” lending opportunities are arising. Peer to peer lending is a way for those who might be turned down by a bank to get the loans that they want/need, while providing an opportunity for investors to make some money by lending to others.
What is P2P (Person to Person) Lending?
Basically, P2P lending is when an ordinary person loans money to another ordinary person using an intermediary. Rather than go through an institution, like a bank, a loan can be had through a P2P lending site where investors can pool together resources to fund a borrower’s loan proposal. Right now, two of the most popular P2P lending sites are Lending Club (Review)and Prosper (Review). These sites help connect people who want to borrow money to those who have a little extra money to lend.
For borrowers, the process gets underway after filling out some information. Borrowers have their credit checked, and they state how much money they want, and why they want it. Borrowers can get money for a number of purposes, from debt consolidation to business start-up to car purchase. Some even use P2P lending to pay for school. Lenders can then decide how much they want to lend to the borrower. Once the the loan is fully funded, the money is disbursed to the borrower, and he or she starts making payments on a schedule. Most loans are three-year loans, but some P2P lenders are beginning to introduce five-year loans.
As one might expect, there are fees that need to be paid, as well as interest charges. As with more traditional loans, your credit score does make a difference in your interest rate. One of the nice things about using a peer to peer lending site is that interest, fees and other expenses are figured and collected for you. Additionally, borrowers only need to make payments to one place (the P2P site), the site makes through that payments plus interest are made to the lenders.
For lenders, it is fairly straightforward. It is possible to lend money in $25 increments, choosing which borrowers they want to invest in. If a lender wants the chance of a higher return, he or she can provide funds to someone with riskier credit. Of course, this increases the chances that the lender may not be repaid; peer to peer lending represents risks to lenders, since the borrower can default.
Who Can Benefit from P2P Lending?
Peer to peer lending comes with different benefits for different people. For borrowers, it is a way to get a loan that they might not be approved for otherwise. Additionally, the interest rates charged are often comparable to — or lower than — what is offered by many more traditional institutions. If credit cards are involved, peer to peer lending can provide a way to pay off debt without paying such high interest rates and reducing the effect of compounding.
For investors, P2P lending provides an opportunity to earn a return on money that can be higher than what the stock market or bonds have offered recently. Even the lower interest rates offer reasonable returns. It offers a chance for ordinary people to make money in a way that is similar to the way banks make money off of loans. However, there are risks as well, since it is possible to lose money when a borrower stops paying on the loan.
P2P lending is worth looking into, since it provides opportunities for borrowers and investors alike. Just make sure you understand what you are agreeing to before you sign up.