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24/08/2022

Peer to peer lending advantages and disadvantages

Table of contents

Introduction

What is P2P?

How does Peer to peer lending work?

Advantages of P2P lending

Disadvantages of P2P lending

Conclusion

Introduction

Nowadays there are a variety of financing options for different purposes, such as loans guaranteed by the federal government, home equity lines of credit, and mortgages on investment properties, to name a few. Other new-age choices include peer-to-peer (P2P) lending and crowdfunding / p2p lending sites.

If you're unfamiliar with peer-to-peer lending but want to diversify your holdings, this is one option to consider. As a result of peer-to-peer lending, you don't need impeccable credit or a tonne of paperwork to connect with people who have a lot of money.

There are, of course, certain downsides to using this kind of investment instrument. Make sure you're fully aware of what you're getting into before going to the closest P2P sites. These platforms are specifically designed for P2P lending.

These businesses connect debtors with private investors who have been verified. Personal loans are theoretically P2P loans, but the lender and borrower do not have any direct communication. When a P2P loan is granted and serviced via the online platform, it is claimed both by the investor and the platform.

What is P2P?

A P2P lending platform connects borrowers with a network of lenders willing to lend peer-to-peer to them. Their creditworthiness and other crucial variables are extensively scrutinized before being approved for a P2P loan. In contrast to traditional lenders, P2P lending services do not use banks as intermediaries.

Borrowers often approach a financial institution like a bank to get a loan. Most of these loans come with a high-interest rate that most borrowers would like to avoid. Loans may sometimes be the sole method for borrowers to pay off credit card debt, school loans, or other financial obligations. P2P financing becomes the next best option in these situations.

How does Peer to peer lending work?

Peer-to-peer lending must first be defined (P2P). With peer to peer lending, borrowers may borrow money from one another directly rather than going via a financial institution. Loan applications from potential borrowers are evaluated by crowdfunding platforms such as EstateGuru and then approved or rejected, depending on how many credit risks are involved and how good an applicant's credit rating is. In marketplace lending where a P2P platform only serves as a marketplace, loan issuance process is done by loan originators. They are responsible for evaluation of clients credit worthiness. Most notable platforms that use the marketplace lending model are Mintos, PeerBerry and Income Marketplace.

The criteria above and other considerations determine interest rates for approved applicants. If the applicant accepts the rules, their idea will be publicized on the site for other users to examine and, if they so want, innovative finance.

The borrowers are then responsible for making monthly interest payments and eventually repaying the principal balance when the loan maturity date is reached.

Advantages of P2P lending

Generally, using a peer-to-peer lending platform as an investment has several benefits.

  • For starters, if you're accustomed to the old-fashioned methods of the conventional traditional finance sector, they make investing simple.

  • The paperwork is greatly reduced since no bank (or federal regulations) is involved.

  • Higher interest rates than in majority of available investment opportunities

  • Peer to peer lending sites unlike banks allows you to make investment decisions yourself by choosing specific loans you want to invest in. Unfortunately, most Peer to Peer lending platforms don't provide much information about borrowers, which is understandable, but real estate investment opportunities are usually well described. This is just one benefit from investing in real estate. To find out more how real estate investments can be beneficial to you, read the articles: The advantages of crowdfunding real estate and Benefits from investing in real estate loans!

Investors have significant advantages using Peer to peer lending described in the article Investor benefits from Peer-to-Peer lending.

Disadvantages of P2P lending

  • Even if you prepare ahead and have a solid strategy, P2P lending is a high-risk investment.

  • Taking out a substantial peer-to-peer loan without thoroughly researching your innovative finance or credit is possible, but it's also risky.

  • Like in any other investing process, there are multiple challenges in Peer to Peer lending such as cash drag, limited loan supply, late payments, early repayments etc. The article about Main challenges in Peer to Peer lending describes these problems more precisely.

Conclusion

Benefits are undeniable, but that doesn't imply that the loans are completely free of problems. There are inherent credit risks associated with any investing.