P2P stands for peer-to-peer. It is lending that helps an individual to put his hands on a loan of any amount but without the intervention of any official institution of finance or a middleman. There are different websites that support P2P lending. Moreover, they are trying to bring better alternatives for finance. You can also call this lending a type of social or crowd lending.
For some additional knowledge, we will love to add that P2P lending was just born in 2005-2006 and still, the consumer crowd has become insane!
Dig Deeper Into P2P Lending Idea!
In this lending process, the specified websites try to connect the lenders with various browsers, directly. They tend to set a decent figure of rates as well as terms that enable a smooth transaction. On the other hand, if we consider the point of the website’s interest rates then, mind that, it usually ranges differently as it depends on the worthiness and credibility of targeted applicants of that particular website.
We will briefly mention, how a P2P Platform works.
- Firstly, a group of investors invests on a P2P platform which is also the loan originator. You must be thinking about what this loan originator means! It is a term you will likely come across at some point in this whole process. It’s a synonym for a lending company.
- After this, the company lends money to its borrowers. If it is a personal loan, the borrower returns the loan and additional interest to the same lending company. Usually, you will receive the loan principal and interest every month.
- In the last step, the lending company deducts a fee and transfers the rest back to your investor account.
When using a P2P platform, you invest directly in loans from the borrower. Typically, you know more about the borrowers’ financial situations as sometimes the platform reveals additional information like the income, gender, age, or country of the borrower.
The lending company does its own credit check of the borrowers to make sure that he is able to pay the loan. And, if he isn’t able to repay, the company takes charge of the debt collection.
Perks Of Investing In This Platform
In this business model, you know exactly where you invest your money into.
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· It is less risky as the lending companies have direct access to the borrower.
- Additionally, the linked company often has the right to check out the borrower’s income, in case he fails to repay the loan.
- P2P platforms are also more transparent as they share more information about the borrowers
Some Cons Of The P2P Platform
Let alone the perks, you will also see some minor drawbacks in investing in a P2P platform. Like,
- There aren’t always enough investment opportunities that match your preferences as you have access to just one pool of loans, originated by a particular lending company.
- The diversification of your portfolio is limited to only loans from one company in one segment in markets where the lender is operating.
- Many P2P platforms fund unsecured consumer loans in developing countries. It means that you should certainly not put all your savings in this asset class.
Can We Consider P2P Lending, A Safe Place?
There is no doubt that lending is risker than other accounts like ‘saving account’. But it feels more compelling as the interest rate is usually a lot higher!
The market of Peer-to-Peer lending is worth more than 84 billion dollars in the year 2022. Moreover, the estimated progressive height of this market is 705.88 billion dollars until 2030!
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