A Guide to Peer-to-Peer Lending: What is it and How Does it Work?

P2P lending or peer-to-peer lending is a form of lending where you request a loan from other individuals by completely cutting out banks and credit unions from the equation. It is an alternative lending model that eases access to credit and diversifies investor portfolios.

Peer loans cut out the financial intermediaries and connect you with peers to receive a loan. You don’t have to go through strict credit checks and lengthy paperwork to get a loan. This type of lending also benefits the lender/investor, who receives a higher return on investment.

How Does Peer-to-Peer Lending Work?

The process is fairly simple and completely online, adding to convenience and quick disbursements.

1. Visit one of the many peer-to-peer lending platforms and submit an online application.
2. The P2P lending platform will assess your application and your credit history. It will assign you an interest rate proportionate to your creditworthiness or risk category.
3. You will receive options from investors who have signed up for the peer lending platform.
4. Study your options on interest rates and repayment periods and choose one that suits you.
5. The platform will approve your loan and transfer the amount to your bank account.
6. As the borrower, you are responsible for making timely interest payments on the lending platform.
7. The platform will charge the investor and you a platform fee for facilitating the transaction.

You must bear in mind that P2P loans are viable for borrowers with poor credit histories and investors looking to diversify their investments.

Merits and Demerits of Peer-to-Peer Lending

There are many advantages to this lending practice. But it also comes with its set of risks.

Merits

• Convenient and quick online process for investors and borrowers alike
• Competitive interest rates
• Diverse loan options for all types of loans, interest rates, and loan tenures
• Diversified and high-return investments for investors

Demerits

• High risk of borrower default, causing losses to investor
• Platform fees are levied on borrower and investor
• Investors may not gain access to funds until the complete maturity of the loan
• Changes in regulations can affect the functioning of peer-to-peer platforms

Considerations for Borrowers

1. Since peer loans are available online, you must verify the reliability and authenticity of the lenders.
2. Do not be in a hurry to take a loan. Do your research. Check other peer-to-peer financing sites and choose the one that works best for you.
3. Check if the monthly EMI and processing fee are per your liking.
4. Be shrewd and negotiate a lower interest rate.
5. Ensure the website is secure. Check for its Symantec SSL certificate, protecting your data.
6. Read all loan-related fine print. Do not jump the gun and finalise a lender before understanding all the terms and conditions of your loan.

In Closing

Peer-to-peer or P2P lending is a new-age lending and borrowing tool for the modern citizen. It has revolutionised the way we take loans and diversify investments.

Although, as a borrower, you would benefit from the competitive interest rates, flexible tenure, and options, be vigilant and research before applying for a loan.

By eliminating the middleman, P2P loans are more accessible and diverse toa. Wider demography. They make lending and borrowing seamless, quick, and convenient.