What Is Peer to Peer Lending and How Does It Work?

You’re looking to get a loan, but you don’t want to use traditional lenders.

What do you do?

Well, one possible option is peer to peer lending.

You might be asking, “What is peer to peer lending?”

Well, peer to peer lending, or as it’s sometimes referred to – P2P lending, is a new form of lending that’s on the rise.

It’s allowing more people to secure loans while allowing individual investors to put their money into specific loans for specific people.

It’s a classic win-win scenario. And it could be a great way for you to get a loan without having to deal with any banks!

Want to learn more? Keep reading!

What is Peer to Peer Lending?

Peer to Peer lending was started in the mid-2000s. The two big names that were established as the P2P authorities were Prosper and LendingClub. Both remain the flagship entities for P2P lending today.

P2P loans are basically loans that don’t involve a banking institution as a middleman. It gets funds directly from investors to borrowers through digital platforms.

It’s sometimes called crowdlending. In the same way as a crowdfunding campaign on, say, Kickstarter, involves a crowd of peers donating to a specific cause, a peer to peer lending situation also involves a loan from a ‘crowd’ of online peers.

So basically, people online lend you an agreed upon amount of money for a specific amount of time, with a set interest rate.

And you’ll be able to use the funds any way you see fit, from business needs to traveling the world.

How It’s Different From a Traditional Loan

In a traditional loan situation, a bank makes all the decisions as far as if you are approved for the loan. It also does all the processing, and administrative required.

With a P2P loan, the platform (while there are others, the usual choice you’ll make is prosper vs. lending club) handles the administrative work.

And the cash comes from individuals, who expect to be repaid by you via the online platform.

For both types of loans, you’ll need to repay both the principal amount borrowed as well as the agreed upon interest.

Why Peer To Peer?

The biggest reason to go with a P2P loan is the convenience. Securing a loan from a traditional bank requires a lot of time and effort on your part. And it can take a while for the bank to process everything.

This means you have to wait longer to get your money!

With P2P, the application usually only takes a few minutes online.

And while interest rates can vary, depending on your credit, P2P rates usually at least beat out the interest rate of a credit card. So they are, at a minimum, a better option than maxing out your credit card!

Of course, if your credit is poor, you are more of a risk. So, just like with a traditional bank, you’ll get a higher interest rate for a P2P loan.

This could mean a rate of as high as 36% for borrowers who are a high lending risk. So, as with any loan, don’t borrow from peer to peer lenders if you are unable to pay back the loan with interest!

Is P2P Right For You?

Hopefully this overview gives you an answer to your original question, “What is peer to peer lending!”

If you have more questions or want more info, contact us today!