Peer-to-Peer Lending is a form of lending money to individuals and businesses. It is a bit different type of funding from recognized financial institutions, including online lenders. This kind of lending does not involve the participation of an official institution.

These are online websites where a group of people lend money to several individuals and small forms. For instance, if you are seeking to borrow £55,000, it comes from 600 people. Though the borrowing is not from a recognized financial institution, online platforms will match you with potential borrowers.

It offers both secured and unsecured loans. However, the former is very rare. Small forms constantly need funding to keep the ball rolling; therefore, unsecured loans are most popular with this kind of lending.

Further, even if you are borrowing a large amount of money, a lot of people are behind the curtain, lending you the group that scatters the risk across the entire group, so collateral is not worth it.

What do you need to do for Peer-to-Peer Lending?

There are various peer-to-peer lending websites that help match borrowers with lenders. You just have to fill in an application form that specifically tells what your business is and how you are about to use this money, and how long. The application form may have other questions about your business, so no lending decision is made hasty.

Unlike small business loans with no credit check, these loans may take a couple of days. Matching a perfect lender and then checking your financial situation takes some time. Like any other kind of loan you take out with a direct lender, per-to-peer loans also involve an agreement fee that you are to pay upfront.

Then, you pay back the loan with interest in monthly instalments. This kind of lending makes it easier to borrow a large amount of money without requiring collateral and at lower interest rates than those charged by direct lenders. This all happens because the risk is spread across each person involved in lending.

What are the benefits of a Peer-to-Peer Lending Platform?

P2P lending platforms have some upsides for both lenders and borrowers. Look at them.

• Wide range of Platforms

You will have a wide variety of lenders so that the platform will match your requirements with the lender, so you do not face any complications down the road. P2P lending has made it easier for a borrower to find a lender that suits their requirements.

• Customized Loans

Another benefit of these loans is that you have the flexibility of borrowing small as well as large loans. You do not hesitate if you need large funding because lenders pool together to fund the big needs of individuals and businesses, and the best thing is you do not need to put in collateral most of the time.

This flexibility is what you cannot get when you borrow money from an online lender. In fact, if you are a student and need a small amount of money for any purpose, you can use P2P lending firms instead of relying on student payday loans from a direct lender.

• Borrowing is very Simple

You just have to put in the loan application, answer some questions, and then you will get money in your bank account. However, the processing of these loans could take a bit of time. If you borrow money from an online lender, you can get money the same day or within 24 hours, but P2P lending platforms may take a bit longer time to transfer money to your bank account.

• No sharing in Business

When you borrow money from an investor, they may ask you to have a share in your business. This means you will have to share the profits of the company with them, and they will also participate in decision-making. You will not have full control over your business, but this kind of problem does not exist when you use P2P platforms. You will have full control over your business.

• High returns to Investors

Although Peer-to-peer lenders charge quite competitive interest rates, they still earn quite high returns. Compared to other types of investments like shares, bonds, etc., P2P lending lets them earn a lot of money in the form of interest. This is undoubtedly a good way of investing money to build wealth.

What are the drawbacks of P2P lending platforms?

There are some downsides as well.

• Interest rates could be higher

Since most of the borrowers that use these platforms have poor credit ratings, the interest rates charged can be a bit higher. You will have to see if it is actually a favourable option. Do proper research before borrowing money.

• Lending risk

The lending risk is extremely high for lenders because most of the borrowers have bad credit ratings, and they can make a default. Lenders may lose all of their money, and since this kind of lending does not come under the jurisdiction, it is extremely hard to chase a borrower to get your money back.

• No government protection

Another drawback of these platforms is that there is no government protection for lenders in the form of insurance in case a borrower makes a default.

What should you do as a borrower?

Here are some questions that you must ask yourself before applying for P2P lending forms.

1. How much money should I borrow?
2. What is the purpose of borrowing money?
3. How long does the loan exist?
4. What are interest rates and associated fees?
5. What will be the default fees?
6. Is there an early repayment charge system?
7. Can I afford money to pay it back?

Final Message

Peer-to-peer lending may be the best platform for some of the borrowers because this may allow lending a large amount of money. However, these platforms come with some drawbacks as well. It does not just involve the risk for borrowers but for lenders as well. Whether you are using these platforms as a lender or as a borrower, you must outweigh the benefits and drawbacks.