For centuries, banks have been the sole provider of loans worldwide. People would go to a bank and request a loan for certain collateral. In this exercise, banks monopolized wealth distribution and money circulation.
P2P lending has disrupted the lending industry for all positive reasons, and today we see an alternative finance industry growing unexpectedly.
As hordes of borrowers and lenders join the P2P world, the platforms have mushroomed in growth since the 2008 financial crisis.
Why is it so? What are the ins and outs of P2P lending? This article covers everything from soup to nuts about alternative lending. So, if you have any questions about this type of lending, you may get your questions answered.
What is P2P Lending?
P2P lending, as the name suggests, helps connect lenders and borrowers through an online platform. Empowered with Fintech, lending becomes more easy and smooth.
The main idea behind this relatively new concept is to remove unnecessary barriers and control the lending criteria and process.
Thus, removing the banks from the intermediary position. So, by definition, P2P lending means connecting lenders and borrowers directly through an online website.
Instinctively, they provide room for borrowers to exercise their loan choice and the lenders to sift through various loan requests and fund partial or full loans.
You may feel it fascinating if you are new to this lending space. Well, the inherent concept of connecting people to people has been there before.
You may see it prevalent in the e-commerce world. Amazon, eBay or any other online platform works the same way.
They connect buyers to sellers and function as an intermediate source to proceed with the payments. The same goes for peer-to-peer platforms.
How does Peer-to-Peer Lending Work?
As a P2P lending platform provides both lending and investing services, it becomes a good source of money generation.
As a borrower or an investor, you need to find the best platform first. You can get an idea of which platform works best through word of mouth or reviews.
Actually, both lenders and borrowers should focus on the interest rate. After scanning the top platforms, you can choose the one that suits your requirements.
A borrower then applies to the platform. After a credit check, their application is approved and listed on the website.
Then, the system would find a lender to provide the funds. Based on your loan requirement and terms, the system would even employ AI algorithms to match you with the perfect lender.
After getting the loan request, an investor would proceed with detailed credit checks that include credit history, credit score and collateral.
In some cases, P2P lending offers unsecured and personal loans. So, depending on the needs, the system goes through credit checks, and if you fall within the favorable criteria, you get a loan.
That’s how a typical alternative lending website works; however, some companies would add certain USPs to promote their services.
A Peek into the Importance of P2P lending?
The importance of alternative lending arose after 2008 when banks couldn’t afford to lend money. People needed money to survive or sustain their livelihoods, and savvy investors were looking for reasonable ROI on their investments to avoid inflation hit.
One way or the other, people were willing to let the cash flow from hand to hand, but banks were wary of an imminent default.
That’s where P2P lending was born and soon became a substitute financing option for lenders and borrowers.
Borrowers demand a reasonable interest rate that they can afford. Assessing their risk appetite, they can get a loan with a payable interest rate.
Similarly, lenders want to earn more than they are investing. As far as bank savings accounts are concerned, the interest rates are very low in times of crunch.
Also, banks can’t afford to put their debt money at stake because they feel people won’t pay the loans, and as a result of mass defaults, the economic situation may worsen.
That’s where P2P lending performs well. They had to increase interest rates to bring more lenders to their website and keep them bearable to urge borrowers to get the loans.
Peer-to-peer lending platforms are abundant in The UK and around the world. They have surged since 2008 and have become an alternative lending source for people.
While it’s still debated that P2P are contenders of banks, the global economy can feel the presence of alternative lending.
Aside from the rival/complement debate, what’s important is the benefit these platforms provide to the consumers. Borrowers can get a loan secured against their collateral for a short time.
Similarly, lenders can earn high interest compared to banks. So, it’s a win-win for both. We have covered the basic facts regarding P2P lending in this short guide. f you have gone through this article, let us know your feedback in the comments.