Cloud computing and the blockchain have disrupted a number of industries and now they have banking and lending in their sites. These advances in technology are putting a lot of power into the people’s hands and cutting out middlemen in the lending industry.
If you need an unsecured loan, you can try something called Peer to Peer lending and not deal with any bank at all.
Whether you need a short term personal loan, or are looking to fund your business so it can grow, there is a peer program out there that is right for you.
In this article, we will look at P2P lending so you can get an idea if it is going to be right for you.
What is Peer to Peer lending?
These P2P lending platforms are essentially a marketplace where individual lenders connect with individual borrowers. Borrowers create an account and publish their needs for a loan. They can indicate how much they need, and for how long they need it.
Then a lender can decide, based on a number of different criteria, who to lend their money to. They are paid the interest from the loan when it is paid back instead of that money going to a bank.
Borrowers with low credit ratings will need to pay more interest than those with better credit. Lenders can decide if they want to risk lending to high risk borrowers in return for a higher interest rate and return. They can also play it safe and accept less interest in return for more security by lending to low risk candidates.
How does it work?
There are different systems for different platforms, but the basics work like this. A borrower fills in an application which usually includes a credit check. After which, an interest rate will be assigned and the borrower can decide if they want to go ahead with the process.
There may be multiple lenders depending on how much each lender wants to put into the fund. After the loan has been funded, the repayment stage begins which is no different than in a traditional banking situation.
Pros and cons of P2P borrowing
If you have a payday loan needed, you can use this service and save a lot of money in fees you normally would have to pay to a typical lender. You can also consolidate your credit cards into one loan that will generally cost a lot less in interest.
The negatives are that if your credit is poor, then you will pay a very high interest rate. Also, if you need a large loan, then generally this type of loan isn’t going to work.
As a lender, you are at risk of losing money. Unlike banks who are insured for this type of thing, there isn’t much recourse if a borrower defaults. You can diversify your portfolio by lending small amounts to various borrowers to mitigate the risk.