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What is Peer to Peer Lending?

BitForex Editor
Sep 30, 2020

For several years, the peer to peer network has been a blessing to investors and lenders alike. The idea that a person who is in need of money can go on to a platform online, match with a willing investor, and get funds for their businesses or whatever the financial need is amazing.  The idea of peer-to-peer lending is gradually changing from what it used to be. However, lending network providers are putting some changes in place to make it safe anyway.

Why do you need to know about peer to peer lending?

It's not a shame to be in the dark about peer to peer lending. Yet it is something you should know about. You never can tell when you'll need a service like this. If a person is in a tricky financial situation, the reasonable payback that a peer to peer lending offers is worth it. Also, if you're an investor looking to maximize profit beyond what traditional financial systems offer, the peer-to-peer network is a good ground.

Who operates in a peer to peer network?

Apparently, there are two major participants in a typical peer to peer network, the investor or lender, and the borrower. Yet there is another. How? There is an explanation, and it's this. Since the gradual change from what the peer to peer lending used to be, that is from a pure social network, the intermediaries have come in. Hence, the third participants are intermediaries.

Meanwhile, this article is going to touch on almost everything that you need to know about peer to peer lending and peer to peer network for starters. You would understand how this evolving financial concept could impact you as a borrower or investor. Also, you would get to know a brief history of this form of lending. Without further ado, let's get into it.

What is Peer to Peer Lending and How Does it work?

The peer to peer lending is a platform that allows borrowers and lenders to connect. And this is what makes this form of lending unique; the social interaction it requires before the money starts to change hands. This means that there is likely better trust between the participants of this form of lending, and the borrowers would be more likely to pay back.

The Concept of Peer to Peer

The concept of peer to peer is not just one. If we are to give the concepts of this lending individual words they would be perhaps, social and pocket friendly. The peer to peer lending is pocket friendly to the lender or investor. Here is how; he would receive interest on the money better than when he puts it in the bank. The peer to peer network also favors the borrower because he can get funds at much lower rates than traditional financial institutions.

The History of Peer to Peer Lending

The reason why the peer to peer lending is changing is that there are intermediaries now. When the idea was first developed, borrowers and lenders would interact and the major motive for supporting each other was that they now had a mutual relationship. However, the peer to peer platforms now allows for intermediaries, through whom the participants deal. Yet the idea of peer to peer lending is not defeated, since an individual lender funds the borrower's loan request.

What is a Peer to Peer Network?

Given, that you now know what a peer to peer network is, the peer-to-peer network seems obvious. The peer to peer network allows the peer to peer lending to work. Hence, the lender-to-borrower or the lender-to-intermediary-to-borrower chain as it is currently is the peer to peer network. Since the intermediaries who are the platform are now the latest update in this network chain, the lending is made secure by ensuring that borrowers are worthy based on their credit score.

What a Borrower Needs to Know

So, this is what a borrower needs to know; credit score matters. Borrowers with poor credit loans are considered risky by the peer to peer lending platforms. And for these risky lot, they do not need to seek crowdlending because platforms will offer them rates no less than banks and other institutions.

Interest Rates

Like you probably already know, interest rates on loans are typically low for the borrower. Yet the rates on investment are worthy for the investor. Averagely, the interest rates for investors is about 6% to 7%.

For the borrowers, there are loan rates as low as 6% and high as 24%. However, what a borrower gets depends on their repayment history.

In the long run, peer-to-peer lending which is also known as P2P would improve the businesses of honest borrowers. Borrowers with impressive credit scores would get loans at cheaper rates than usual. Also, fulfilling the repayments would help the borrower to take up better loans with lower rates in the future.

To have an idea about the extent of the peer to peer lending, there some established facts. For instance, in Australia, the peer to peer lending market for consumers was worth about $230.1 million.

Conclusion

P2P websites connect borrowers and lenders directly with an impressive rate for both parties. While the rates may vary depending on the website or platform, crowdfunding is generally a preferred choice for the two parties. In fact, the major reasons why P2P borrowers exist is because they need to find cheaper loan rates that are apparently more realistic.

The P2P platforms will decide the rates that borrowers and lenders get. They also ensure that borrowers payback. However, the government does not typically guarantee that your money is secure with peer to peer lending websites. Funds invested in the platform seem to be at the owner’s risk. Hence it might be beneficial to find a platform that is trustworthy and stands the test of time. Yet this form of lending is legally an investment in the USA. And lenders can take legal action if a platform defaults. A few of the most prominent P2P lending platforms are Ratesetter, Zopa, Lending Works, Lending club, and aux money.

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