The pros and cons of peer-to-peer lending

Peer-to-peer lending or P2P lending is an innovative financing method allowing lenders and borrowers to come together on one platform. But what are the pros and cons of this type of financing? Whom does P2P lending benefit? Peer-to-peer lending is beneficial to all those involved in the process. It is beneficial for the borrowers as they can get money at better interest rates. Lenders benefit as well since they can earn interest on their money without having to do much other than getting registered at a P2P lending portal. The portal itself benefits as they charge fees from both the parties. Started in 2005, this new financing scheme has many advantages. What are the pros of P2P lending? Peer-to-peer lending has many benefits.

  • Lenders can get a higher return on their investments. This happens without having to invest in savings schemes and without having to do anything other than registering at a portal.
  • It helps lenders reduce their risks by lending money to different borrowers. The lender can decide to whom they want to lend. If they feel there is a risk in lending to a particular borrower, they can refuse as well. They can also have easy access to their funds and there would not be any lock-in.
  • For a borrower, they get loans easily without cumbersome procedures. Those with lower credit scores can also get loans here. The interest rates here are lower since the lenders are not banks with financial overheads. Fees payable to banks like an application fee, processing fee, etc., are out of question.
  • The process is smooth and without any delays. Loans can get disbursed fast and since the entire system is online, it involves minimum work for all parties.
  • For the P2P lending service provider, this is a great business opportunity as they earn on fees from both parties and charge a late fee as well. This is a $3 billion industry and the prospects are good.
  • Small businesses can easily get loans here and it helps the economy. Since the entire business is online, the lenders and borrowers can access all the records and get alerts and notifications on payment schedules, the payment received, etc.

The cons of P2P lending

  • It is a new concept and there is no regulatory agency monitoring the process. It could create a potential risk in case of any problems.
  • Since a credit score system is not used, payment of loans on this system does not help people to improve their credit scores. Also, businesses have to take a loan in the name of the owner.
  • There is no personal interaction between the borrower and the lender. Risk of default by the borrower also exists and since the loan is unsecured, recovery may be a problem. There is no protection to either the lender or borrower from the government and in some states, it may not even be legal.

P2P lending is beneficial as it allows borrowers easy access to funds. Though there are risks associated with this financing scheme, the benefits seem to outweigh the limitations.

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