Understanding P2P Loans – The Basics of Peer-to-Peer Lending
By Reza Machdi-Ghazvini
In the current financial world, where interest rates are extremely low, smart investors need to look to other methods to make their money work – and grow.
P2P loans is a rapidly growing sector of the loans market and an increasingly attractive proposition for lenders and investors to use – but what is it?
Understanding P2P loans – or peer-to-peer lending – is fairly simple. Think of it as a form of crowdfunding, which raises money from various sources in order to fund a project.
A P2P loan is similar, in that it brings private individuals, businesses or public bodies who are seeking funding to a lending platform (such as GoFundMe, LendingClub, Prosper) where platform users, acting as investors, can choose to loan money to the respective people, companies or institutions.
What is significant in P2P loans is that there is no ‘middle-man’ (usually a bank or other financial institution) overseeing and approving the deal. For P2P loans the platform would evaluate the offer, making the necessary credit checks, before hopefully taking a deposit and granting the loan – and adding whatever fees or commission the platform takes.
Where Did it Begin?:
P2P loans actually started as a system to help people or companies who found it difficult to attain loans through the conventional methods, or even to help those who already had a large loan (such as a student loan debt) consolidate it at a lower interest rate.
Nowadays P2P loans are used much more extensively, from car loans to home improvement to business hardware. They are also used by people with a range of credit, from good to bad – although the rates for people and businesses with good credit are, naturally, more favourable.
What to Look Out For:
Like any consumer or investor it is wise to research your chosen product thoroughly before purchase – and a P2P loan platform is no different.
The sites will make their money differently, with most including fees on every transaction made. Commissions are also sometimes charged by the lender or the borrower – or sometimes both – so make sure the small print is studied forensically. Also, like traditional austere financial institutions, beware any charges for late or bounced payments.
What are the Benefits?:
Interestingly, P2P loans have benefits for those with very good credit ratings and those with very poor credit ratings.
For those with a good credit rating, you can use your power as leverage. This means lenders on the platforms will generally be happy to offer you a better loan rate than a traditional bank or building society. This is because they will be more confident in a safe return, so more likely to make a favourable offer.
For those with a poor credit rating, lenders may be much more open to offers. Traditional loan institutions are much more rigid in their evaluation of borrowers, but independent investors can take an approach that suits them and may be open to more potential ‘risk’.
Finally, P2P loan platforms don’t have a minimum loan amount, which means if a small loan is needed, this may be the place to go.
In a shifting financial world in a turbulent climate, people need to manage their money more carefully – and seek out better options to make it work.
This is true for both borrowers and lenders, which is why P2P loans are growing as an option in the vast loans market – and why they could be just the right option for you or your business.
Reza Machdi-Ghazvini (CAIA) is an expert in finance and the founder of Enqome. He wants to show people how to safely manage their personal finances and gain more financial freedom.