What is Peer to Peer lending and how does it work?
By Greg Nunan
Peer to peer lending (also known as social lending or crowlending) and commonly abbreviated as P2PL, is a form of alternative finance, it refers to the practice of lending money to another, sometimes unrelated, individual but without the interference of regular financial institutions; it takes place online by means of different lending platforms and some other credit checking tools provided by P2P lending companies‘s websites.
This lending method has proven to be widely successful mainly because it represents a way for individuals to obtain financing which they would otherwise not easily get by regular means, mainly due to having a poor or bad credit history or for not possessing a regular source of income. As such, it could be the perfect solution to those people trying to obtain bad credit personal loans.
The main advantage of Peer to peer lending, thanks to its high efficiency, are the low interest rates for the clients and a higher return of investment, especially when comparing them to those rates offered by regular financial institutions or banks. Naturally, the “middle-man” or in this case the p2p company involved in the transaction, receives a commission for the matchmaking job, with the process ending on a win-to-win situation for all the parts involved.
Peer to peer lending advantages and key-features:
- A previous bond or knowledge of the people involved in the p2p lending is not necessary at all.
- It´s a win-win situation for borrowers as for the investors.
- Interference of banks or regular financial institutions is non-existent. The only intermediary will be the company which provides the platform for the transaction to take place.
- Transactions take place completely online. There’s no need for previous meetups, document signing, nor any other offline activates making P2PLs a really fast and functional process.
- Lenders are able to choose in which borrowers to invest and review any peer’s profile and background (this may vary depending on the p2p site used).
- The loans are securities that can be transferred or sold to other lenders in the market.
- Most peer to peer loans are unsecured personal loans, but secured loans are also offered by using luxury assets as a warranty insurance.
Peer-to-peer lending is the perfect solution for:
- Personal loans
- Micro loans
- Credit card debt refinance
- New businesses or startups financing
- To finance creative projects like films, video games or music albums
Other forms of peer-to-peer lending are:
- Student loans
- Commercial and real estate loans
- Payday loans
- Secured business loans, leasing and factoring
Peer to peer lending companies
As of now, there exist in the market many p2p companies in countries all over the world, with most of them belonging to either the UK or the US. In general most P2P intermediaries provide the following services:
- An online platform which allow borrowers to attract lenders and for them to be able to identify reliable investment opportunities that meet their criteria
- Verifying borrower identity, perform credit checks and background profiles and filtering out the unqualified
- Credit models for loan approvals and pricing
- Processing payments from borrowers to lenders who invested in the loan or project
- Special payment collection services, in case borrowers refuse to pay or not respond
- Finding and matching new lenders and borrowers
- General customer service
Peer to peer lending sites
Some of the most popular and used p2p company sites are:
The first P2P lending site to be established, not only in the UK but in the world, back in the year 2005. As of today, Zopa has over 500,000 clients and has generated credits for over 600 million pounds. One of the most trusted P2P companies without question.
Regarded as the major P2P company in the world, Lending Club (an American Company) has granted over a 120,000 different loans involving as much as 1,500 million dollars in transactions. They operate fully online with no branch infrastructure, using technology to allow them offer really low interest rates for borrowers and attractive returns for investors.
Prosper claims to have more than 218,000,000 USD in personal loans funded. As a site that is eligible for US residents only, Prosper has also a way of determining the reliability of the borrowers in the form of what they call the “Prosper score”, which will also determine the loan´s interest rate it gets.
Founded in 2012, Upstart is a platform that allows borrowers to obtain an unsecured funding through fixed rate loans. And to determine this rate, Upstart does a deep background check on the borrowers, such as the school they attended to, their academic grades, field of study and employment history. Safety is something not taking lightly by Upstart without doubt.
Kiva is the world’s largest micro-lending website, it works along a great number of microfinance partner institutions all over the world, allowing it to be able to provide affordable loans to either low income or poor credit borrowers.
A company mainly focused on student loans, LendKey could be defined as a “loan facilitator, which helps match loan requests with lenders, rather than a regular p2p company. LendKey offers private student loans and student loan refinancing from regular private lenders.
Launched in the UK in 2010 but recently expanded into the US, Funding circle focuses on serving small business owners who the banks have “left behind” to help them grow their business. Since their launch, they claim to have lent over $500 million globally to small businesses.
In Latin America the p2p lending model has great potential as countries like Mexico or Brazil have interest rates which tend to be extremely high to borrowers and yet the return of investment is not at all high. Kubo is the Peer to Peer lending leading company in Mexico. In average, clients get rates as 50% lower than those offered by the regular finance systems and organizations from that country.
Visit: kubofinanciero.com (site in Spanish only)
How to choose the best lending site:
In order to choose the best Peer to Peer lending company for you, it is imperative you first determine what is the nature or the reason why you need this financing for: is it to invest in your business or open a new one, is it for college or other studies, perhaps a startup or a personal loan. Once done this you can focus, after doing some research, on choosing the site that best answers and adequates to your particular needs, we recommend you visit the P2P sites and compare interest rates, requisites for entering and opinions of other users. A wise tip would be for you to join the biggest and faster growing P2P platforms or sites, as the lending size of the community is clearly a key factor to the success of every single borrower.
The future of P2P Lending
In recent years, the p2p industry in the US, as in the UK, has been doubling the amount of lending transactions over each 6 months, this steadily growing will soon probably allow the P2P market to achieve a mainstream status; a recent public poll in the UK showed that 15% of the population has already heard of the P2P model and/or companies and that they would be willing to try it in the near future.
Even in less developed countries, P2P lending markets are altering the finance landscape. Some say that in the future software will put banks, as we know them, out of business; who can really say?, but one thing we do know almost for sure, is that (even if adjusting a little) the peer to peer lending model is not going to disappear anytime soon.
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