Peer-to-peer lending or in short P2P lending is a methodology through which an individual can borrow money directly from the creditor. This methodology has completely transformed the current financial system as it wiped out the reliance on a financial institution to borrow up to a certain extent. The popularity of the websites that supports peer-to-peer lending has increased dramatically since the last few years as these websites have evolved as an alternative method of financing.
The sites that offer the service of peer-to-peer lending sets the rate, terms of the transaction, and performs the transaction on behalf of both the lender and borrower.
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Working Procedure of P2P Lending Platform
The way crowdlending platforms work is pretty much self-explanatory and counterintuitive. All you need to do as an investor is to open an account and deposit a small chunk of money that can be credited to the borrowers. The interest rate imposed on the borrower is calculated by the financial profile posted by the borrower. The loan applicant can review numerous offers displayed by the platform and can opt one of them based on personal preference.
All the process regarding the credit process is all handled by the P2P platform that includes releasing of the money to the borrower and monthly loan repayments. Even though the process of lending or borrowing is completely automated, but creditors and borrowers can haggle regarding the interest rate.
Some P2P lending sites are specifically designed to address the requirements of the specific kind of borrower. For instance, StreetShares is designed particularly for small businesses.
Advantages of P2P Lending
As every innovation generally comes with them both positive and negative aspects.
1. Convenient and Faster
Sine all the lending process in the peer-to-peer lending platform happens over the internet. As the whole process of borrowing and lending occurs digitally, so it consumes a lot less time than the conventional financial institution. It is quite evident from the past track record of too many transactions, loan application could be either rejected or approved within 72 hours.
2. Low Eligibility Criteria
Another great attribute of P2P lending is that get loan approval in P2P lending is pretty much simpler than a conventional bank. You could be eligible for the loan in the P2P lending platform even if you have low income and credit score.
3. Low Markup
As you might all aware of the fact that interest rates may vary from bank to bank, but in most cases, interest rates are quite higher. Conversely, interest rates are quite lower in the P2P lending platform.
Drawbacks of P2P Lending
Now, let’s see some of the disadvantages of Peer-to-peer lending:
1. Offers Small Quantity of Loans
The biggest setback of the P2P lending platform is that it only allows a small number of loans. The highest amount of loans that can be offered by the P2P lending platform cannot exceed $35,000. This amount might be sufficient for an individual, but this amount isn’t adequate to address the requirement of large business organizations.
2. Restrict the User to Enter Personal Credentials
Many P2P lending platforms are specifically designed to fulfill the borrowing requirement of an individual or a small firm that’s why in order to register yourself for the loan, you are restricted to enter your personal information that includes financial information and credit reports.
We can easily prophesy the growth potential of the P2P lending business that in the upcoming future number of platforms that offer lending service to an individual will increase drastically. P2P lending has managed to gain much traction from an individual than the conventional bank and bonds.