What Is a Peer-to-Peer Lending Platform?

Did you know there’s a rising alternative to bank lending? It’s called peer-to-peer (P2P) lending wherein borrowers and lenders alike interact and transact within an online platform. Back in the day, the way you’d get a loan is by going to a credit union or a bank. You’ll wait for a loan officer to go through your documents and crunch the numbers before he tells you if your request has been approved or disapproved. Thanks to P2P, you can now go straight to a third party or individual to borrow money, or other people can approach you directly to loan from you.

How does peer-to-peer lending work?

P2P is an innovative system that has disrupted the way you can get money for funding or investing. This industry has even seen an annual growth of 110% since 2006. Whether for auto loans, home improvements, debt consolidation, and more, chances are you are bound to get money faster and easier from a P2P more quickly than from traditional means.

A P2P lending site sets the terms and conditions, rates, and the infrastructure to make transactions possible. If you’re an investor looking to grow your money, you’ll have to register and open an account in a P2P site. You’ll become part of the site’s investor base. You’ll deposit a sum of money that you’ll want to be dispersed into loans.

If you’re the one to apply for a loan, you’ll have to set up a profile containing your personal and financial information. The site will assign you under a risk category which determines the interest rate you must be willing to pay. The P2P company screens your credit worthiness to rule out the ineligible applicants. Some P2P companies will even reach out to employers to verify a candidate’s information.

After this process, you’ll be able to view a set of offers and choose ones to accept. Some applicants submit multiple loan requests. You can do the same as well for easier tracking of your borrowing.

After negotiations, as soon as both borrower and lender agree on the terms, the site facilitates both money transfers and payments.

What are the advantages of P2P?

A convenient alternative

P2P is one of the alternative lending schemes for businesses or individuals who are unwilling or unable to get loans through conventional means such as banks. In P2P, the loans are sometimes unsecured; it allows you to use non-traditional collateral for underwriting.

Crowdfunding made easier

If you need to source huge capital but have found that no single entity is willing to lend you that much, a P2P site can help you do crowdfunding. This is where you solicit from a greater pool of organizations or individuals. From small pieces of contributions from your pool of lenders, you’ll be able to build the capital you’re aiming for.

Better rates of return

Since P2Ps don’t require much cost to maintain their platform compared to a bank, it usually won’t cost much to invest in a P2P. This factor contributes better returns to lenders than in a conventional bank. Since P2P sites don’t hold any loans themselves, there isn’t a huge interest margin compared to banks. There are higher rates of return, though, based on the fact that lenders are exposed to greater risk, because there can be no deposit insurance and no promise of steady returns.

How to look for a reliable P2P platform?

First and foremost, how easy is it to find all the information you need about a P2P platform? Do they have an actual business address on their site? Can you look for some feedback about them on social media or Google reviews? Is the company regulated?

Read their FAQs. Is it explicit how much they’ll charge on a borrower or lender? How much is the fee and will this be reasonable for you? You must also inquire further from the company about where they’re keeping your funds. If it’s in a bank account not separate from theirs, this is a red flag. In this situation, if the company defaults, its creditors will recover their loans through your funds.

Another question to ask is what security they carry for your investments. Some P2P companies have physical property security for some loans. If this loan defaults, you’ll recover your money from the sale of an estate. But this might take a while.

For all the merits of P2P lending, it helps to be smart about it. If you’re an investor, choose your candidates carefully. A P2P company won’t be responsible for any monetary loss. You may also want to diversify your investments into multiple loans to mitigate the risks.

If you have a business, being in a P2P platform opens up more options for you. Additional finances can help you start or even expand your business. Always consider your options critically so that you get the most out of a P2P platform.