Peer to peer lending is a new way to finance personal or small business loans without a bank. In today’s difficult economic environment these new loan alternatives have reduced the complexity and high cost of bank lending. Peer to peer lending connects individual borrowers to investors through a third party service such as Lending Club or Prosper.
The primary advantage of peer to peer lending is that borrowers get lower interest rates and lenders receive higher returns on their investment.
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Getting started with peer to peer lending is simple! Whether you are looking to secure personal loans at an attractive interest rates or have some extra money you are willing to invest, peer lending is an excellent tool to help you achieve financial success.
Advantages of Peer to Peer lending:
- Low loan interest rates for borrowers – as low as 7.70% APR
- Attractive returns for investors – as high as 12%
- Avoid complexity of bank loans
- Easily manage risk
- Lend money directly to others that are in need
Investing: Peer to Peer Lending
Peer to peer lending networks connect a large audience of investors to borrowers via the Internet. Lenders can preview loans based on various criteria such as loan amount, credit history, interest rate, etc. Using these factors a smart investor can use peer to peer lending to gain above average returns on their investment.
The unique structure of peer to peer lending allows an investor to loan very small amounts of money (as low as $25) to minimize risk in case of default. By spreading investments across several loans a lender can reduce the chance of large losses when a borrower defaults. Unlike more traditional investment opportunities, this new alternative allows an investor to carefully calculate risk and accurately predict returns with online investing.
After determining which loans to fund lenders can transfer money between their bank account and their favorite social lending sites. When a loan goes into repayment the monthly payments are transferred from borrowers to the corresponding lenders. Most peer lending sites charge a small service fee to handle these transactions.
Borrowing: Peer to Peer Lending
Peer to peer lending allows borrowers with good credit to get personal loans at attractive interest rates. Today these sites offer an alternative for borrowers in place of conventional funding options such as banks or credit cards. Peer lending networks provide a simple and convenient process for borrowers to find lenders at lower interest rates.
A borrower can instantly find out the interest rate they qualify for by filling out a personal loan request online. Most online lending networks have very high credit standards to reduce risk to their lenders. If a borrower qualifies they will receive a fixed interest rate over the term of the loan. This interest rate is calculated by a number of risk factors as determined by the social lending site.
Peer to peer lending networks allow approved borrowers to post their loan request on the site in front of potential lenders at their approved interest rate. The loan will be listed for a short period of time (usually around two weeks) where it can be reviewed and funded by potential lenders. If at the end of the review period the loan is not fully funded, the borrower can accept the loan as partially funded or attempt to list the loan again.
These sites are aimed at borrowers that are looking for unsecured personal loans. These range from financing large purchases, paying for weddings, or refinancing existing high-interest loans and credit card balances. Borrowers are using social lending to get RV loans, car loans and even boat loans without the restrictions that normally come with bank loans. Many borrowers use peer to peer lending as an alternative to conventional home improvement loans.
Once the loan is successfully funded, the full amount is deposited into the borrower’s bank account. Then according to the loan terms, each month the loan payment is withdrawn from the same bank account.
Investment Risk
It goes with out saying that every investment comes with its share of risk. Peer lending allows investors to minimize their risk by hand picking the loans they choose to fund. Using all the information that is provided by the borrower an investor can take a calculated risk with peer to peer lending.
Social lending has the same risk factors as more traditional investment options. Investors may lose all of their investment. Before getting started with online investing take the time to read through the “Prospectus” provided by each site and completely understand all risks that are involved.
Unsecured personal loan notes are not guaranteed or insured in any way. There are however protections in place for the lenders in the event a peer to peer lending site is unable to meet its financial obligations or goes out of business.
Considering the recent investments in peer lending sites by large venture capital firms this is just the beginning of a larger trend in social lending. Peer to peer lending has become an attractive option for both borrowers and lenders because it offers competitive rates and reduces the complexity that comes with typical bank loans. Consider the all the risks involved before investing.
