Peer To Peer Lending
As traditional banks have raised interest rates and tightened their credit standards, a large number of people are moving towards the new concept of peer to peer loans. They come in as a valuable alternative to individuals who are not capable of or willing to access institutional finance.
The earlier alternative was to borrow from family and friends. However, that had social stigma involved since it meant disclosing your financial position to other people who may know you.
Peer to peer loans has come as a solution for people who want to borrow from other individuals. For the borrower, there are obvious benefits involved. For the lender too, the rates of return can be pretty high, and it provides diversification too.
In this article, we will have a closer look at this concept of peer to peer loans. We will also analyze the pros and cons.
What is Peer to Peer Lending ?
Peer to peer lending is an algorithm that matches the needs of the borrower with that of the lender. This whole process takes place anonymously with the peer to peer platform playing mediator between the different parties. A typical peer to peer loan functions in the following manner.
The peer to peer lenders has a purely online presence. They do not have any physical infrastructure like branches, employees, etc. This is because they want to keep the costs really low. This is what allows them to charge reasonable interest from the borrowers and yet provide sizeable returns to the investors at the same time.
What Purposes Do Peer to Peer Lenders Provide Loans For ?
Peer to peer lenders offer loans for both personal as well as business purposes. Typically loans are taken for debt consolidation, medical expenses, home improvements, etc. However, fairly large loans are also given on these platforms for starting a small business. Sometimes people even use peer to peer loans to come up with financing for their car or money for a down payment on their mortgage.
Benefits of Peer to Peer Loans
Disadvantages of Peer to Peer Loans
To sum it up, peer to peer loans are an attractive alternative for borrowers who want privacy or who have been turned down for loans by traditional banks. However, these loans have their fair share of issues which both the borrower and the lender must be vigilant about.
Authorship/Referencing - About the Author(s)
The article is Written By Prachi Juneja and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.