The Pros and Cons of Peer to Peer Lending
- July 3, 2019
- Will Turner
Peer to peer lending is simply a form of borrowing and lending which does not involve any financial institution such as a bank or traditional lending agency. As the name implies, it is a type of borrowing and lending between individuals. In the United States, websites (also known as platforms) such as LendingClub and Prosper offer this type of service.
Many borrowers feel that banks are hard to deal with, while many investors feel that banks do not pay a high enough interest rate on their savings. This situation has allowed peer to peer lending platforms to grow significantly in the past 10 years. Every year, billions of dollars in loans are facilitated by these platforms.The largest peer to peer lending platform is Lending Club. There are over 200,000 individuals investing in loans through LendingClub. To maximize their return on investment, they select a Lending Club strategy which helps ensure that loans selected for investment are likely to be repaid.
The technology of the platform allows borrowers to submit applications online with minimum information. The platform then checks their credit and provides this information to potential lenders. Lenders are individuals who have opened an account with the platform and provided funds that can be loaned. The lenders can decide which loans they want to invest in. The platform acts as the intermediary by providing customer service, collecting the loan repayments and then giving the money back to the lender. They also provide collections services if the borrower does not make payments on time.
As with any loan, the higher a borrower’s credit score the lower the interest rate will be. From a lenders perspective, the interest rates are much higher than they can receive with other investments. However, it is likely that some loans will not be paid back, in which case the investor will lose their investment. Overall, the return to investors is usually positive and sometimes very high.
Pros of peer to peer lending
·Peer to peer lending investing is a good option if you want to borrow money because it can be cheaper than banks and other lending agencies. All you need is a good credit rating, and you can receive a loan quickly.
·Many loan websites have no minimum as to how much you can borrow as opposed to banks. This could be of help to you if you want only need a small amount of money.
·Peer to peer lending often has an easier application process which makes the process less stressful for the borrower.
·For investors, peer to peer lending pays higher interest rates on their money than they could receive with other fixed income investments.
Cons of peer to peer lending
·Depending on your credit rating, you may be subject to high interest rates.
·The platform may also charge you significant fees due to arrange the loan for you. There may be hidden fees like having to repay more than the amount of funds provided to you.
·The protection is limited in a peer to peer platform as compared to if it was a bank.
·For investors, they may lose their investment if a loan is not repaid.
The rapid growth of peer to peer lending shows that it is a viable alternative to traditional borrowing and investing. P2P lending investing will continue to gain market share while more and more people turn to these platforms to borrower money.