Peer to Peer Loans Explained

Social lending has emerged as a popular alternative to traditional lending over the past few years, giving both lenders and borrowers cause to celebrate. But what exactly is peer to peer lending? And what do peer to peer loans give you that other loans can’t?

P2P Loans

Peer to Peer loans (also known as p2p) are based on the very simple concept of matching borrowers with lenders. Traditionally, banks hoarded savers cash, and made a certain amount of it available to lend to other customers. So although the idea isn’t new, cutting out the bank is. The availability of online peer to peer lending marketplace’s, makes it possible to connect those who want to save with those who want to borrow – leaving the bank behind.

The benefits are obvious. An individual who deposits their money for lending can earn far higher interest on their savings than from a bank, while borrowers are able to benefit from competitive lending rates. This is because social lending is far more efficient. A peer to peer lending platform does not have the same overheads as a bank, and is not taking big risks on the markets with their customer’s money.

P2P Lending Platforms

The principle of P2P loans is broadly the same, but most person to person lenders work in a slightly different way to each other. So it’s worth spending some time reading up on how each individual peer to peer lender operates.

Borrowers

Generally speaking most peer to peer lenders will credit check potential borrowers, but other p2p lenders will consider the overall circumstances of the borrower to make a considered decision on whether to allow them to borrow. Once accepted, borrowers are categorised into different levels, depending on how much they want to borrow, for how long, and their risk level. They are then matched with the most suitable lenders.

Savers

As with borrowers, most peer to peer lending platforms will ask the saver what type of risk they want to take, how much they want to lend, and for how long. To protect savers, the money is normally spread between different borrowers to minimise their risk. All parties normally remain anonymous to each other.

Benefits of P2P borrowing

The main reason people are attracted to p2p lending, is the feel-good factor. The human side of lending and borrowing between individuals rather than through a financial institution appeals to borrowers and lenders alike. However, as a practical solution, p2p borrowing is another option outside of traditional lending, and is often a cheap way to access credit. As with all loans, this is dependent on the applicant’s credit rating, and bad credit borrowers may have to pay more, but borrowers are normally allowed to pay off their loan early if desired, and lenders can earn greater interest rates than putting the money in the bank. As mistrust for the traditional banking sector grows, peer to peer lending may soon overtake the banks as the most viable way to save and borrow.

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Ben Arhin

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