All You Want To Know About Peer-to-Peer Lending
Peer-to-peer lending helps connect lenders and borrowers for loans, eliminating the need to go to a financial institution. This kind of lending has become so popular that there are dedicated websites for the same. People are greatly adopting this method of lending as an alternative method of financing. P2P lending is also known as social lending or crowdlending.
How does it work?
With the help of P2P lending websites, borrowers can directly connect with investors. The site has all the relevant information about the terms and conditions and rates of the transactions. Different sites have different interest rates, which are determined based on the applicant’s creditworthiness.
If you are an investor and want to participate in P2P lending, you have to open an account with the particular site and deposit a certain sum of money, which you want to disburse as a loan. Again, if you are a loan applicant, you have to post a financial profile that will be assigned to a risk category, determining the interest rate you will have to pay. Once your application is approved you can then review the various offers and accept the one which suits you the best. Many applicants break their finance and accept multiple offers. The money transfer and the monthly payments will be handled with the help of the website.
There are some lenders and borrowers who look for websites which specialize in a diverse portfolio of businesses. For example, StreetShares is a platform meant for small businesses.
The Evolution of P2P Lending
Earlier, P2P lending was limited to only offering loans to people who have been denied credit access by conventional institutions. Recently, peer-to-peer lending sites have extended their service to target borrowers who might need money for a variety of reasons like home renovation loans or debt consolidation.
For lenders, peer-to-peer lending is a great way to earn money in the form of interest. They earn cash at a rate that often exceeds those that are offered by the conventional certificates of deposit or savings accounts.
What Investors and Consumers Should Keep In Mind
- The investors, who are keen to join a peer-to-peer lending site as investors, should always think about the default rates.
- Any investor or consumer should consider peer-to-peer lending websites only after they have checked the transaction fees. The sites may have late fees, bounced-payment fees or loan origination fees.
- P2P lending has started resembling the subprime mortgage lending system, responsible for a very big financial crisis.
Peer-to-Peer lending in India
Peer-to-peer lending in India has already revolutionized the lending scenario in India. The platform has promised great returns in a very short period. The lenders and borrowers both receive mutual benefits, with healthy returns and without the presence of a middleman.
Peer to peer lending started its journey from the Western markets but India soon gained momentum. The banking sector in India can provide credit to a very small section of the people, compared to the population size of India. Thus, P2P lending is quite helpful to meet the credit needs of many other organizations or individuals which make this digital service popular.