Borrower to investor mode of financial transaction also known as peer-to-peer lending is a type of debt financing that helps individuals to borrow and lend money without the aid of traditional financial institutions. Peer-to-peer loan providers also called P2P platforms facilitate these transactions by helping match borrowers with investors who have the capacity and are willing to fund their loans.
These P2P platforms technically offer lower interest rates than most traditional financial institutions, making them an enticing option for borrowers. In addition, P2P lending platforms offer a rather flexible repayment plan compared to more traditional lenders, giving borrowers the opportunity to make smaller, more frequent payouts.
Over the years, P2P lending platforms have become increasingly popular, seeing that they offer a variety of advantages for both investors and borrowers. For investors, P2P lending platforms offer the opportunity to make higher returns than many other traditional investments, such as government bonds and savings accounts. For the borrowers, peer-to-peer lending platforms offer lower interest rates and a more flexible repayment term than the typical lending options.
Key Facts You Need to Know about Peer-to-Peer Lending Platforms
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If you have it in mind to use a P2P platform to either invest or borrow money, there are a few key points to keep in mind:
1. P2P lending platforms are not under the same regulations as traditional financial organizations. This makes it necessary to conduct your own research and choose a platform that is most reputable, transparent, and reviewed. Check out online review websites.
2. Interest rates on these peer-to-peer loan platforms can vary widely from each other. So, it’s best to compare rates from other platforms before making your selection.
3. Lastly, remember that P2P loans are not collaterally backed up, so there are bound to be risks involved.
Despite the seeming risks, peer-to-peer lending platforms offer a range of advantages for both investors and borrowers. If you need a lower interest rate loan or a higher return on your investment, a peer-to-peer platform may be the best option for you.
How Does P2P Lending Work?
Peer-to-peer lending platforms work by matching borrowers with investors who are willing to fund their loans. The borrower in turn makes a repayment to the investor, with the platform taking a small fee for loan facilitation.
The platform also allows borrowers to bypass the high overhead charges associated with traditional lending options. Also, P2P loans are often easier to qualify for than most traditional loans. This is a result of lending money falling solely on the shoulders of the investors, each of whom usually has different criteria(s) for approving a loan.
Owing to this fact, borrowers who don’t qualify for traditional loans may still be able to meet these criteria(s) and get funding through the P2P platform. For investors, however, P2P platforms provide an opportunity to make higher returns than what is possible in more traditional investments such as bonds or savings accounts. This is mainly because peer-to-peer loans then carry higher interest rates than other investment types.
Peer-to-peer lending platforms also offer investors the ability to spread their funds across multiple loans. Spreading their funds across multiple loans helps them mitigate the risk of loan defaulting. By doing this, investors can earn huge returns while minimizing their risk factors.
Benefits of Using a Peer-to-Peer Lending Platform
When it comes to borrowing money, there are a ton of options available. You can simply go to a bank, online lender, or credit union. There is the option of using a P2P platform too. Here is a list of benefits you enjoy when you use a peer-to-peer lending platform.
1. The interest rates on P2P loans are relatively lower than rates on traditional loans.
2. P2P loaning platforms have a shorter application process than other lending options.
3. P2P platforms offer more flexibility than other lenders
4. Peer-to-peer lending platforms are more transparent than traditional lending options
5. Peer-to-peer lending platforms are more accessible than regular loaners. This is because borrowers can apply for loans from anywhere in the world.
So, if you ever find yourself in need of a loan, you may want to consider using a P2P lending platform.
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Risks of Using a Peer-to-peer Lending Platform
Almost all lending options come with one form of risk or the other, and that rings true for the peer-to-peer lending method. One of the glaring risks of P2P lending is that it is not regulated by the government like other lending options like banks and financial organizations. This means that there is zero guarantee that your money will be safe if the platform ever folds up.
In addition, P2P platforms are tasked to follow the same consumer protection laws as regular lenders. The implication here is that you may encounter some legal problems if something goes wrong. Another risk factor is that these P2P platforms do not perform credit checks on the borrowers, which means that there is a more than 50% chance of defaulting. It then behooves the investor to perform their own background checks on the borrower to ensure they can pay back the loan.
With P2P, who is bearing the risk of the borrower defaulting on the loan? Unlike bank deposits, P2P lenders bear the credit risk of loan defaults. This risk can be as high as 10%.
Also, bear in mind that P2P lending is still a very new industry and there are possibilities that new risks will emerge the more it grows. If you still wish to go ahead with a peer-to-peer platform, especially as an investor, keep up with the developments and latest news to be aware of any looming risks.
How to Choose a Reputable Peer-to-Peer Lending Platform
Choosing a transparent and trustworthy P2P is as important as planning your finances. This is because there are so many shiny platforms to choose from and there could be fraudulent platforms hiding in the glitters. How then do you make the right decision about the best P2P platform?
1. Loan terms: check to see what the loan terms are on the platform. Most platforms have a minimum and maximum loan term. Ensure these terms meet your needs.
2. Regulation: check to see if the platform is regulated by the Securities and Exchange Commission (SEC) if you are based in the United States and the Financial Conduct Authority (FCA) if you are based in the UK or other similar financial regulators. In the United States, its regulatory responsibilities were divided up among the OCC (federal savings associations), the Fed (savings and loan holding companies), and the FDIC (state-chartered savings associations).
3. Fees: some P2P lending platforms charge fees, so ensure you check for any fee before signing up for loans on the platform. These fees usually come in the form of prepayment penalties, late payment fees, and origination fees.
4. Reputation: check for reviews, comments, and the number of users on the platform. Also, do extensive Google research on Google and YouTube if possible.
5. Interest rates: the interest rates on P2P platforms can be quite high, so ensure to always compare rates before one.
By meticulously following these tips, you can rest assured that you will find a suited and solid peer-to-peer platform.
Fees Associated with Using a Peer-to-peer Lending Platform
Your P2P lending platform can charge both borrowers and lenders some fees for using your services. These fees include:
- Borrower Fees
- Lender Fees
Borrowers sometimes pay an origination fee and prepayment fee if they pay off their loan early. Investors pay an annual servicing fee and may be required to pay a late payment fee if a borrower misses a payment.
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How to Get Started Using a Peer-to-Peer Lending Platform
So, you have gone through all we have to say about the P2P lending option and you would like to go ahead to become an investor or borrower, here are steps to take to ensure you get smooth sailing in your journey:
1. Do your research. Not all the P2P platforms are suitable for you or legal.
2. Check your credit score and ensure you are eligible to borrow.
3. Know the amount you need to borrow.
4. Ensure you have a fail-proof way to pay back the loan.
5. Compare interest rates and terms
6. Read the fine print i.e. terms and conditions from start to finish. DON’T SKIP A LINE!
When you follow these steps to the T, congratulations! you’re on your way to a successful peer-to-peer lending journey.