What is Peer to Peer Lending?
Peer-to-peer lending, also known as “social lending” or “crowdfunding”, is a relatively new form of funding that takes place through online platforms and allows individuals and companies to borrow and lend money to one other. P2P lending, as it is often called, is a way to cut traditional financial intermediaries such as banks out of the process by allowing borrowers and lenders to interact directly with each other.
The funding provided is usually an unsecured loan.
For a potential borrower, they would agree to a credit check and have to disclose financial information as well as details about their business and the reasons for the loan.
Lenders diversify by investing in multiple businesses to mitigate the risk of any one borrower defaulting on their loan.
Who would use P2P Lending?
Any person who wishes to avoid traditional banking loans and who has a sound investment plan and proper financial information. It is not suitable for startups or NINA (No IncomeNo Asset) businesses. In other words, you need to have a solid credit rating and track record.
Pros and Cons of P2P lending
- The internet funding mechanism makes the process very quick.
- There is much less documentation involved
- Lenders are likely to apply lower interest rates than banks
- The application procedure is less discriminating than traditional banking
- Lenders are not governed by the same financial industry regulations applied to traditional banks and have fewer protection policies in place
- Peer-to-peer loans can damage your personal credit score