Peer-to-peer lending is a unique concept of financing where lenders and borrowers are brought together by online service providers. This is a cost-effective type of financing. What is peer-to-peer lending? Peer-to-peer lending is a concept where a service provider (usually online operates) brings together lenders and borrowers on one platform. It is also referred to as P2P lending. The service provider lays down the ground rules on how the system works. Since lenders operate on an online platform, they do not have many overheads. They also include one’s peers i.e. common people looking for better returns for their money. As a result, they can offer loans at a lesser interest rate. This would be beneficial for loan seekers. The concept of P2P lending Peer-to-peer lending can be compared to crowdfunding. Some refer to it as social lending. The concept here is that there is no financial institution involved and no intermediary involved other than the website or the service provider who runs the P2P lending platform. The absence of an intermediary allows for financing at more competitive rates. Both lenders and borrowers are peers or people at the same level. The lender has money and wants to earn interest. The borrower wants money and is ready to pay that interest. The platform only brings them both together. Mostly, P2P lending is done on an unsecured basis, meaning there is no collateral or security for the loan. This concept has been operational since 2005 and is now considered as a new and innovative form of financing. How does P2P lending work? The process is initiated by the P2P lending platform which usually is a website. This website brings lenders and borrowers together on one platform. Someone who wants a loan can apply on the website where the procedure could be as given:
- The applicant fills an online form, providing all his details
- The P2P platform evaluates the application, assesses the risk involved based on the credit rating and other parameters
- Based on lenders already available, the applicant is given details of the lenders, the rates at which they are offering loans and the terms
- The applicant can review the various options and decide which one is more favorable based on the rate of interest as well as the terms and conditions
- The applicant then chooses one of the lenders and the loan amount is disbursed
- Monthly payments are made by the borrower to the lender as per the terms agreed until the loan is paid off
- The P2P platform charges a fee from both the borrower and the lender to cover its expenses
How is P2P lending a win-win? P2P lending is a win-win situation for all parties. The platform gets paid for bringing the two parties together. Borrowers get unsecured loans at better interest rates and lenders earn interest on their money. P2P or peer-to-peer lending is an innovative way of financing. A platform or service provider would bring together lenders and borrowers which is beneficial for all parties involved. The lender earns interest on his money, the borrower gets a loan on good terms and the platform gets paid for facilitating this.
