Peer-to-peer (P2P) lending is a type of lending that allows borrowers to borrow directly from investors through online platforms stated by Bahaa Abdul Hussein. This type of lending eliminates conventional financial organizations like banks. With P2P lending, people can borrow money from other people or institutional investors.
How does peer-to-peer lending work?
In a P2P lending project, the borrowers submit their applications to the online platforms, stating the amount they want to borrow and the reason for the loan. The application is then reviewed by the investors. They decide on the selections to fund the loans based on the borrower’s credit profile and other related issues.
Advantages of P2P lending for borrowers
Here are some of the advantages of P2P lending for borrowers:
- Lower Interest Rates: P2P loans are typically lower in interest rates than normal bank loans, especially for people with good credit.
- Flexible Terms: Applicants can always go for a lot of loan terms and repayment plans that suit them.
- Quick Approval Process: The Internet process for P2P loans is usually quick and easy, with most of the borrowers being approved and the funds being provided within a few days.
- No Prepayment Penalties: Normally, in P2P loans, the borrowers can repay their loans ahead of the deadline. They do not need to pay any penalties for early payoff; thus, they are saving some money on the interest.
Advantages of P2P lending for investors
Here are some of the advantages of P2P lending for investors:
- Higher Returns: Through peer-to-peer loans, these returns are possible and much higher than the returns of other low-risk investments.
- Diversification: The investors can opt to diversify their investment by putting it into several loans; thus, the risk of any single loan defaulting is lessened.
- Control over Investments: Investors are the ones who make the decision on which loans to fund. This allows them to choose the loans that meet their risk tolerance and investment goals.
Risks of Peer-to-Peer Lending
- Default Risk: The problem is that the borrowers may not pay the loan back, which would mean a loss of principal for the investors.
- Regulatory Risk: Alteration of the laws related to P2P lending could lead to the modification of the returns and working of these platforms.
Conclusion
Peer-to-peer lending has come to be a popular alternative to banking, which has been the norm. Thus, the borrowers get the loan at lower interest rates and the investors get a higher rate of return. Although there are some dangers, quite a lot of people are now using this method to borrow and invest.
The article has been written by Bahaa Abdul Hussein and has been published by the editorial board of www.fintekdiary.com
