Crowdlending is a rapidly growing market for small businesses and individuals looking to borrow or lend money.
According to crowdlending experts, it has the potential to compete with the dominance of the conventional banks and other financial institutions such as credit unions but involves some degree of risks for both borrowers and lenders.
Peer-to-peer lending, in its simplest form, uses a web-based platform to match borrowers and lenders directly.
In this form, lenders loan funds directly to the borrowers. The site matches lenders and borrowers using proprietary algorithms, more or less like a dating site, to access the credit risk of potential borrowers and establish the interest rate to be charged.
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It also offers the mechanism to transfer the funds from the lender to the borrower. The same mechanism allows the borrower to make repayment with interest as per the agreed terms.
European players in the P2P market include Mintos, Grupeer, Crowdestate, and Monethera.
How Does P2P Lending Work?
The process begins with borrowers filing an online loan application. The borrower will need to enter the loan details and verify his or her identity. The p2p platform will then check the credit history of the borrower according to the financial information provided.
Using this financial information, the platform will assign an interest rate depending on the size and the duration of the loan. After a short period of time, your credit will be in the market for possible lenders.
On the other end, the investors get to browse for loan requests from the borrowers; just like an online shop but for possible investments. The lenders are provided with the cost, interest rates, and the reason for the loan.
The lender then can finalize the loan when he or she is satisfied with the terms provided and confident with the credentials and purposes of the borrowers. The lender can either fund a whole loan request or pool with other lenders to complete the funding.
Pros and Cons of Crowdlending
For borrowers, P2P lending is the best and generous alternative marketplace to find loans. Some of the benefits of peer to peer lending to borrowers include:
- The loan application is simple and straightforward
Unless you have massive credit issues, your loan can be approved in just hours. However, the funds could take longer to reach your bank account because this would depend on the lenders. Crowdlending platforms are also more secured, therefore no need to worry about the risk of exposing your identity or identity theft.
- Crowdlending is more lenient with credit credentials
Though credit score matters, you can still get loan approval with a few bumps, but with a possibility of the high-interest rate. The worse your credit history is the higher the interest rate is going to be. However, there is a very slim chance of you getting approved for a bank loan or a credit card, making p2p lending the best option.
- You can borrow money for whatever reason
You can apply for loans to cover your medical emergency bills, vacation, buying a new vehicle, or refinancing debt. A platform such as Crowdestate approves loans for real estate development, while Mintos approve personal loans for such things as vacation and luxury. For any reasonable purpose, Crowdlending provides you with a chance to get funded with similarly reasonable demands.
- The maximum loan amount is smaller than in banks
Crowdlending may not be your top option if you are thinking of buying a property since most of the loan offers are a maximum of $500,000 only. And even so, it is hard to get approved for that amount without a staller credit history to back up your application. This limit is aimed to protect the lenders who risk a significant amount of money on the platform. In this case, your best option will be a bank loan.
- Lots of interest to choose from in Crowdlending
Investments can reach up to 30 percent for some loans, though this comes with steeper prices that may take longer to repay. This is much higher than the normal 0.10% to 5% rates you will find in savings or time deposit accounts in traditional banks.