Tag Archives: Peer-to-Peer Lending

Peer-to-Peer Lending (P2P)

INTRODUCTION

You cannot manage a household or do much of anything in this world without the input of money. There are so many people who lack the financial means to live and enjoy a high-quality life.  Money is what stands in the way of them acquiring their needs or wants. When there is a problem, various solutions will be thrown up. Welcome to the world of Peer-to-Peer Lending (P2P).

DEFINITION

Peer-to-peer lending is legal and recognized by the government. The use of official financial institutions as avenues to source for funds can be tricky, intricate, and cumbersome to some people who do not meet the required credit standards. Poor credit is the barrier between the borrower and the needed loan.  Credit Cards are an option for people who have poor credit, but they come with restrictive credit limits and high interest rates.   Most people are not comfortable with borrowing from sources other than insured financial institutions, yet they need access to financial capital. This scenario created the rise to the advent of Peer-to-Peer Lending (P2P).

Clearly defined therefore, this means of getting money is a method of debt financing whereby individuals can either borrow or lend money depending on the situation without recourse to any financial institution acting as an intermediary. The middleman is technically removed from the lending process. In some circles, it is known as social lending.

WHO ARE THE BENEFICIARIES

The borrowers and lenders are individuals. This mode of transaction is conducted online. The fact again must be laid bare here that most of the people that conduct their business through this method are those that have been rejected by established financial institutions. The reason for this is due to the fact of their inability to repay those loans.  Most financial institutions will not lend money out in such risky scenarios.

Despite all the odds however, Peer-to-Peer Lending (P2P) has come to stay as a means of getting needed cash to people who are desperate. There are instances of people who have taken advantage of this medium of borrowing.  The emergence of new intermediaries in this mode of borrowing money is also time saving compared to traditional lending sources.

CHARACTERISTICS OF PEER-TO-PEER LENDING (P2P)

  • The transactions take place online.
  • There is room for intermediation by a peer-peer-lending company.
  • If the P2P offers total facility, the lender will more often make a choice between borrowers; they will choose the ones they will lend money.
  • Some (though not all) of the P2P platforms provide transfer facilities or what is referred to as free pricing choices. It applies to debt collection as well as to profits.
  • In this system of monetary transaction, there is no need for a prior knowledge/common bond between the lender and the borrower.
  • In most instances, it is conducted for profit.
  • The loans under this category can be secured or unsecured.

WHY PEER-TO-PEER INTERMEDIARIES

The initial concept is to do away with being forced to borrow from approved financial institutions:

  • A means of getting new lenders and borrowers.
  • The development of credit models meant for loan approvals and for pricing.
  • There is need for some verification before each deal is sealed. Issues such as borrower identity; employment; bank account and income can be verified through the intermediaries.
  • It will enable the performance of a borrower credit check with the sole aim of separating and filtering out dubious and unqualified borrowers.
  • There is the need to process the financial transactions, borrowers will pay and same will be returned to those that lent out the money in the first instance. The processes need effective co-ordination which can be guaranteed by the intermediaries.
  • There is the aspect of tiding up the legal aspects and the reporting of such which are performed by the intermediaries.

THE LEGAL ANGLE 

In most countries of the world, the art of soliciting investments from the public is considered illegal. To get legal cover; the language adopted is crowd sourcing. This is an arrangement whereby people are made to contribute money in exchange for potential profits based on mutual efforts of those in the group; it is known as securities.

THE ADVANTAGES

  • It is two-way traffic; a sort of win/win situation for both the borrower and the lender. The borrowers will get access to funding otherwise not available from traditional bank. On the part of the lender; they are guaranteed higher returns more than they would obtain elsewhere.
  • It assists people and is beneficial to the community.
  • It supports the efforts of individuals to break free from the burden of debt.
  • It discourages those that are involved in activities deemed immoral-the ones that are detrimental to the society.

THE DISADVANTAGES

  • Interest rates may be higher in other to cushion the effects of likely loss occasioned by defaulters.
  • Measures to enforce repayment of the loans through the government are not in place.
  • The default on repayment of the loans is very high.

PEER-TO-PEER LENDING (P2P) PLATFORMS

If you are interested in learning more about peer to Peer lending (P2P) or participating in this practice, please see the below list of top rated (P2P) platforms:

CONCLUSION

There is the risk factor in any business or investment endeavor. But considering all factors, Peer-to-Peer lending (P2P) has come to stay and it is now a strong factor in the economies of most countries-the developed and underdeveloped alike.

Please remember to check with a financial professional before you ever buy an investment and to read my Disclaimer page.