What Is Peer-to-Peer Lending?
If you are looking for a way to invest your money but don’t want to go through a bank, you might want to learn what is peer-to-peer lending. With this type of investment, you lend money directly to individuals or businesses, rather than investing in stocks or other securities.
If you are interested in peer-to-peer lending, there are a few things you should know before getting started. Here, we’ll discuss what peer-to-peer lending is, how it works, and whether is it a good option for you.
Peer-to-peer (P2P) lending is a type which gives individuals an opportunity to lend money to borrowers without going through traditional financing institutions such as a bank. It can be as easy as going through an online platform that matches borrowers with lenders. There are many benefits associated with this type of lending. First, it is a great way to earn a higher return on your investment than you would with a traditional savings account. It’s also a relatively low risk since you’re lending to people who are already making regular payments on their loans.
With all this being said, be sure to understand the risks it can bring before getting involved.
How Does Peer-to-Peer Lending Work?
There are lending platforms designed specifically for matching borrowers with investors. Lenders can choose which borrower they want to give funds to, or even multiple of them to reduce the risks. If you are a borrower don’t forget that through these platforms you will also meet multiple lenders. The biggest advantage of this type of lending is that it’s quite affordable for the borrower. There is no bank or other institution so no additional fees. Another plus is that if you are a borrower, you’ll be able to get the needed funds within just a few days.
If you are currently considering investing money, this type of lending is definitely worth considering. The process is fast and easy and interest rates could be negotiated. Keep in mind that there are many platforms that offer the best peer-to-peer lending for new investors.
Advantages and Disadvantages of Peer-to-Peer Lending
P2P lending platforms will match you with borrowers who need funding but be cautious with your choices. As a lender, you’ll meet many borrowers so choose wisely which one you want to invest your money with.
Advantages
- A better way to invest money than going through the bank.
- Negotiable interest rates
- Flexible terms you can choose
- The quick and easy application process
- Growing popularity- this type of lending is getting more and more popular, so there are more options available, and many borrowers applying.
- Supports small businesses and entrepreneurs- which will boost the local and global economy.
Disadvantages
- Strict eligibility requirements in order to access the platform- sometimes these platforms will have a long list of requirements in order to be able to sign up.
- High-risk loans- if you are an investor be careful where you decide to invest your money.
- High-interest rates- some lenders will offer really high rates to offset their risks so the borrowers could lose involvement.
- More risks for the lender than the borrower
Whether peer-to-peer lending investment is for you, will depend on your personal needs and goals. If you are thinking about financing a loan, be sure to do your research and understand both the advantages and setbacks before making a decision.
Peer-to-Peer Lending vs. Bank Loans: What’s the Difference?
When it comes to taking out a loan, there are a few different options available. The most popular one is taking out a loan from a bank, but many people search for better alternatives. Peer-to-peer loans are seen by borrowers as a great way to get the necessary funding without waiting as long as you would with a traditional loan. Let’s talk about other differences between them.
Bank loans are taken out from a bank and usually involve other fees that P2P loans do not have. They will also give you a higher interest fee that usually cannot be negotiated. These loans take longer to be issued and many borrowers do not want to wait that long.
As for lending peer-to-peer, even if a borrower gets an offer with a high-interest rate, they will be open to negotiation with the lender. With no bank fees involved, they will certainly pay less. These loans also offer flexibility with terms and conditions a borrower may not be able to get from a traditional bank.
So, which one would be right for a certain borrower? That really depends on what they are taking money for, how long are they willing to wait, and also a credit score.
Is Peer-to-Peer Lending a Good Idea?
If you want to invest your money and just don’t want to wait in line in the bank or buy stocks this may be the perfect option for you. With good interest rates and flexible terms, these loans are gaining popularity on a daily basis.
One of the main peer-to-peer lending benefits is that they provide more affordable lending with no additional fees, so the borrower typically chooses this over the bank. The platform for this allows peer-to-peer lenders to choose the length of the loan and the repayment schedule, so this is a great option if you are an investor, and if you are a borrower just know they can be negotiated.
What Can Peer-to-Peer Lending Be Used For?
Funds that borrowers gain through these loans can be used for anything you, as a lender, approved for – home improvements, business ventures, debt consolidation, or medical bills.
Alternatives to Peer-to-Peer Loan
As for borrowers who are not sure that this is the right type of loan for them, there are many other options they can choose from.
- Personal Loans – can be obtained from banks, credit unions, or online lenders. If you have a good credit score and need a lump sum of money you can consider this option as well.
- Home Equity Loan – If you own a property, you may be able to take out a loan against its equity. They typically have lower interest rates with good terms, making them a good option for borrowers who need cash.
- Credit Cards – If you don’t mind high-interest rates and need money quick you should consider this option as well.
- Payday Loans –This is a type of short-term loan. Comes with high-interest rates and other fees and should be paid in full once you get your next paycheck.
Final Thoughts
If you are a lender/investor P2P lending can be a great way to get started in the world of investing. Even if you are a borrower there are many upsides to these loans.
However, there are a few things you should keep in mind. If you are a lender don’t look at this as something that will get you rich fast and understand how risky peer-to-peer lending is.
As for borrowers, don’t get stuck in the first offer you get. Browsing around is a must with these loans, as many lenders will give you many different offers to choose from.
If you want to take out this loan or finance someone’s, be sure to do thorough research and talk to your financial advisor to avoid unnecessary risks.
