What is Peer to Peer Lending?

October 13, 2010

It would be an understatement to say that the Internet has changed the ways that we do a lot of things over the past two decades. The world of financial transactions have greatly changed as well – we can pay our bills online, transfer money to and from our accounts online, and trade stocks and mutual funds. What might have seemed unimaginable when we first started using the Internet is now commonplace.

One of the recent developments in the financial realm is the advent of “peer-to-peer” lending websites. These websites enable people to borrow money from other people, so that the borrowers can get the money they need, and the lenders can make a good interest rate on the money they lend. Here is some advice about this new phenomenon:

The Borrower’s Perspective

There are a number of reasons that individuals borrow from peer-to-peer lending sites, including:

  • Debt Consolidation. Many individuals carry balances across a number of high interest credit cards. One strategy to paying off these debts is to take out a loan and pay off their balances, thereby consolidating the debt into a single loan. By consolidating their debts, many people are able to save money in interest payments, and find it more convenient to only make a single loan servicing payment each month. Many times these borrowers are overextended, and can’t easily get another loan in order to refinance the others, so they go to peer-to-peer lending sites.
  • Small Business Loans. When people lose their jobs, they sometimes respond by starting their own businesses. These businesses often require capital, but the process of obtaining a loan from a bank or other traditional funding source can be complicated and time-consuming. Taking out a business loan from a peer-to-peer lending site can make the process go much more smoothly for a new business owner.
  • Personal Events. Sometimes borrowers need a loan for one-time personal expenses, like weddings expenses, to purchase wedding or engagement rings. Banks generally won’t loan money for these reasons.
  • The Lender’s Perspective

  • Some people sign up to be lenders through these types of websites because they like the feeling of being able to help people who are in financial need. But most people choose to take on a lender role in order to make a return on their money, though. The interest rates to be earned on some loans can be much higher than a person can make elsewhere. These high interest rates often come at a cost, however.
  • Most peer-to-peer lending websites allow investors to “bid” on proposals from individuals who are looking to borrow money. These prospective borrowers are required to give certain financial information to the website, and the website assigns a rating (essentially an estimate of risk that the borrower will default on the loan). The lower the rating (i.e., the higher the risk of default), the higher the interest rate available.
  • If you want to investigate these types of financial transactions further, simply do an Internet search for “peer to peer lending” or “person to person lending” to find a list of websites.

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