Loans Without Banks? P2P Lending

What Is Peer To Peer Lending?

The idea of peer to peer lending, or micro-finance,  is hardly new. In fact, the concept must be far older than any of the sophisticated financial institutions that most of us borrow money from today. What is fairly new is the rise of large online peer to peer lending sites like Prosper. *

Peer to peer lending, in its basic form, simply means that one person borrows from one of his or her fellows. The huge institution of a bank, mortgage or auto finance company, or credit card company is not involved. Asking friends or family members for loans is hardly new. Today, most large p2p loans involve a third party, middle man, but the middle man simply performs some basic functions.

Advantages Of Peer To Peer Lending

Back in the day, not so long ago, it was so easy to get credit that the popular show – Married With Children – had an episode revolving around the family’s antics when Buck, the dog, got a credit card. The economic problems of the last few years certainly reversed the situation. Here’s the view from many potential consumers, savers, and borrowers today.

• Banks pay very little on ordinary savings accounts, bank CDs, or bank money market accounts. Banks are safe places to put money, but when inflation is higher than interest, it seems hard to win by saving this way.
• Meanwhile, interest rates on a lot of normal consumer credit offered by lending institutions has increased, or, certainly not declined the way savings rates have.
• Lending institutions have gotten a lot stingier with money. Consumers with marginal credit ratings are not getting credit, while people with fair to good credit are paying a lot more for their loans. Even people with decent credit are getting their loans put through a microscope, and many credit cards have reduced the maximums for many consumers without a real reason that consumers understand.

I am not writing this article to argue the pros and cons of these changes. I am just making the obvious case that consumers have a much tougher time getting credit, and when they do get a loan, they are paying much more for it.

What Does P2P Lending Do?

When the institution is removed, and potential lenders are able to use their savings and investment money to decide who they will make loans to, the huge bureaucracy of banks or other lending institutions gets cut out. This means that the lenders may realize higher returns on their money, while borrowers can take advantage of lower rates. There is less of a margin in between.

Borrower Advantages

You can certainly understand the potential borrower advantages of peer to peer loans over banks, finance companies, and certainly over so-called payday loans. Note this reasearch that has shown that borrowers, who get a chance to tell their side of the story, are more likely to get loans funded.

Lender Advantages

As a potential lender, you are free to review the borrower’s request and posted credit information. You do not have to fund the entire loan, but can just agree to fund part of it. Other lenders may fund the rest. You have the potential to earn much higher returns than you would by putting your money in a lot of other saving’s vehicles. Yes, there is risk, but so far, returns have been pretty fair.

View some Prosper lending statistics. You can see that riskier loans have a higher potential default risk, but also have the chance to provide much higher returns. Less risky loans provide a lower chance of default, but a lower poteintal upside. You are free to manage your loans as you see fit.

Online Peer To Peer Lending Websites

So now some popular peer to peer lending sites have emerged.

•  Yes, they do still take a cut for their services, but it is much smaller than the profit that larger lending institutions sseem to need.
•  The lenders assume a bit more risk, but they also get a lot more control and better returns.
• Many borrowers get to enjoy loans at more affordable interest rates too. They may also have a better chance to make the case that they deserve a loan.
• The peer to peer lending site, as a middle man, does do some credit and background checks on the individuals who want a loan. But potential borrowers also get a chance to state their case directory to the people who they want to borrow money from.

Basically, this way of getting loans and making loans allows the borrowers and lenders more control over the final outcome. The P2P company will take a small cut from each repayment. Yes, loans still could default, and they could be turned over to a collection agency. This method is not without risk, but reviews have shown favorable returns.

Peer To Peer For Good And Bad Credit Loans

Borrowers with established good credit can enjoy very low rates because the lenders will not assume as much risk. Poor credit peer to peer borrowers will agree to pay more for their loans, but this allows them a second chance to get a loan, and rates much lower than they could hope to get from an large lender.

* This website has an affiliate relationship with Prosper, though we are in no way employees of that company. As with any other investment, there is risk involved. As a lender or borrower, you must do your own risk management. This article has been provided as a way to introduce you to the concept of peer to peer lending, and not to provide any financial advice.

Propser is a third party website – and once you visit, you fall under their terms and conditions.

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Tags: creidt, loans, p3p, peer to peer

This entry was posted on January 29, 2012 at 10:23 am and is filed under Finance & Insurance. You can follow any responses to this entry through the RSS 2.0 feed.