You might have heard of peer-to-peer lending as the term has turned out to be a popular one for individuals looking to gain finance. While numerous references can be made from merely spelling out the term, it is essential that we understand it for what it stands to be. So to get things going in that direction, you need to read the following set of points because it explores the basics of peer-to-peer lending.
Different from a Bank Loan
One of the first aspects that you need to know about peer-to-peer (P2P) lending is the fact that it is different from bank loans. While bank loans tend to come in after banks use their assets, peer-to-peer lending comes from investors who will also have direct contact with borrowers. Both the borrower and the investor are matched through a lending platform, and investors get to see which loans they want to fund. Due to this effortless nature of carrying forward the transaction, peer-to-peer lending has turned into an important phenomenon.
In terms of specifics, peer-to-peer loans are most commonly small business loans or personal loans. So if you want something bigger, then this is not the platform for you. Apart from that, lenders also place certain restrictions on the types of people who can invest in their loans. While these restrictions are not widely visible, they do exist to a certain extent. Moreover, the marketplace lenders also generate revenue by charging borrowers and taking out a percentage of the interest earned on the loan.
The Pros and Cons
The fast and effortless experience that peer-to-peer lending offers is definitely a pro, and it affects both the investor and the borrower. But there are risks present in the business, and one will have to learn to face the same. The risk of losing money, less liquidity when compared to bonds and stocks, instability, and other related aspects are the many cons of peer-to-peer lending that essentially affects the investors.
But they are also bound to face benefits, and those take shape in the form of higher yield than a savings account, diversification of investments, gaining access to alternative investments, and so on. These benefits help investors take the right step when the time is right. On the other hand, the borrower also faced benefits like no prepayment penalties, unsecured loans, the flexibility of funds, a lower range of interest rates, etc.
A low credit score, limitations for borrowing, transaction fees, and other related aspects tend to come in as the cons for borrowers. Due to all that, one needs to look into peer-to-peer lending before going in as a borrower or an investor. Hence, those were the basics of peer-to-peer lending.