Peer to peer lending is a process that occurs when, instead of you borrowing money from your bank or your credit union, you receive loans from another person. This cuts out the ‘middleman’, which would be the bank or the credit union.
The person who is lending the money would actually get a higher return from peer to peer lending than they would through investments or putting money into their bank accounts.
In previous years, peer to peer lending most often took place between family members or close friends. In the age of the internet, websites that introduce borrowers to lenders and lenders to borrowers are becoming increasingly popular.
Ever since the credit crunch occurred and banks clamped down on lending money, more and more people have turned to peer to peer lending. However, there are several things that borrowers and lenders need to know to protect their interests when choosing this path.
Advice for Borrowers
If you are the person borrowing the money, you can benefit in several ways from getting loans from other individuals. The interest rate is the most popular benefit of peer to peer lending.
This is because borrowing money from a bank or credit union, both of which have a higher overhead, translates into a higher interest rate for you. Lenders involved with peer to peer lending do not have the high overhead.
Another benefit from the borrower’s standpoint is that since banks are now stricter when it comes to criteria for granting loans, an increased number of people are participating in peer to peer lending, which is more permissive in regard to loan criteria.
However, it is important to note that people who lend money through peer to peer lending networks may decide to only lend to people with good credit scores.
Small business owners often turn to peer to peer networks if they find that they are struggling to secure loans through their banks. Some small business owners who have an excellent track record for payments find that banks are charging them higher interest rates as well as fees.
It is important to keep in mind that when using a peer to peer network, you are dealing with people who are lending you money that they have worked hard to earn. You should always take these loans seriously and be diligent about paying back the money.
Advice for Lenders
If you are the person who is lending the money, there are a couple of factors that you need to be aware of as well. The first is that banks are currently not offering a very high interest rate on savings accounts. So you can earn more money by using a peer to peer network.
Peer to peer lending should be treated like any other investment. You need to be careful who you lend money to and you should take the time to do some research on risk management. Only lend money that you have saved and can spare, not money that you depend on for day-to-day survival.