We’ve all heard peer to peer lending is the new way of borrowing and repaying money, but because it’s still in its infancy, many are unsure of exactly what it is. With so many new websites popping up on a fairly consistent basis, it looks as though this method of securing financial backing is here to stay. To understand this new financial avenue, we asked the experts.
Peer to Peer Lending, or P2P lending, is an agreement between individuals and bypasses, in its entirety, the more traditional avenues for borrowing money. Because of the individual factor, a new relationship is formed than the one most have with their bankers. It’s more personal and beneficial for everyone involved.
Average citizens with a bit of cash lying around are able to put those funds to work by loaning it to another citizen who’s willing to repay the loan with interest. That interest is usually lower than what a bank would charge, too. On average, the national rate that borrowers pay is 11.41%. Peer-to-peer lending, however, offers rates starting at around 6%.
There may or may not be collateral required, but even if it is, it’s not the same things a bank would demand, such as CDs or other worthy financial assets. With peer-to-peer lending, the people determining a borrower’s fate aren’t what one might envision. They’re not “fat bankers” who are kicked back in their expensive offices, but rather, they’re everyday consumers looking to do a good thing while also earning money.
How it Works
A would-be borrower completes an application, which, depending on the dynamics of the organization, will go through the classic credit check. It’s then calculated to determine the risk, if any, to lenders. Once the application is approved from that perspective, it then goes into a bidding scenario where lenders will compete via bids to fund the loans.
There are no guarantees an applicant will gain a lender willing to fund his needs, and there’s always a chance they’ll enjoy a great rate if more than one lender is competing for that particular borrower’s financial needs.
There are also those scenarios where lenders will commit to part of the loan, which can result in there being several lenders who fund the loan. They’re each getting a piece of the pie, so to speak. This also allows lenders to mitigate their risks when they’re dividing up their approvals among several borrowers. Many P2P lending companies will allow lenders to buy into loans with less than $100. It also ensures multiple sources of income each month, too, as borrowers pay back their loans.
The first step for borrowers is to create a free account on the peer 2 peer company’s website, and from there, complete their loan application. As mentioned, part of that process includes a credit check, but this is also where the borrower provides information for what the loan will be used for, how much he needs and other details that will vary depending on the unique dynamics of those applying for money.
Why Now?
Let’s face, the financial collapse of recent years has meant big changes in the American banking system. Consumers have lost faith and with each new scandal, they’re even less certain of those big banks and their ulterior motives. With CEOs being forced to testify in front of Congress, along with billion dollar losses and accusations of everything from embezzlement to scandals in their personal lives, bankers just aren’t held to as high an esteem as they once were.
Folks have had to get a bit creative in their efforts. It was simply time to find alternative ways to pay down debt while also planning for the future.
Risks
It’s foolish to believe this is fool proof with virtually no risk. While some lenders don’t mind taking a leap of faith occasionally, there are those who take advantage of the research the peer to peer companies provide. There are many who go into these agreements knowing they’re taking a chance on someone who needs a break, someone who needs that one shot of moving forward or living out a dream.
It’s difficult to paint a picture of a typical borrower, since they are as varied as their needs. Generally, they fall into two categories – those without access to traditional bank products and those who have lost faith int he banking system. The lower interest rates help, too.
Borrowers may be behind in their mortgages due to an adjustable rate or who are trying to rebuild after a layoff or other job loss. Then there are those looking to offset the expense of going to college and who seem to be “right there” in being able to afford it, but just need that final financial boost.
Credit card debt is another reason some borrowers turn to peer to peer lending: they wish to consolidate but don’t qualify for a consolidation loan at their banks. Others may be young married couples who thought they were about to welcome a bundle of joy, but instead, learn they’re having twins or triplets. The needs run the gamut.
There are many reputable companies that are brokering these deals and putting borrowers and lenders together. Just as one would read the fine print associated with a credit card offer, all parties looking to go into p2p lending should do their own due diligence as well.
