Peer-to-peer loans, as the name implies, are loans made from person to person. It is a form of collective loan that connects borrowers to investors through digital platforms. The lender works as an intermediary between the investors and borrowers. They manage these funds and connect the investors to the respective borrowers who are in need of the particular loan plan, without the need for interference from banks and financial institutions. The lender deals with all the documentation and payment procedures.
Here’s how peer-to-peer loans work in a few simple steps:
The borrower accesses the desired lender and creates a credit request.
If your application is pre-approved by the lender, it will be offered to investors in an online portfolio.
Investors then choose whether they want to finance the loan and how much they want to invest.
If it is financed, the lender then receives the loan amount from the registered account and the investors receive their monthly repayments.
Usually, the peer-to-peer loan is used to finance small businesses. This is because entrepreneurs need inexpensive capital for expansion or even for working capital.
Investors create their portfolios on the platform and can browse and select the loan they want to fund. In return, a fee is paid to the lender. At the end of the loan agreement, the investor receives the contribution made along with interest received excluding the lender’s fee.
To the borrower, it is just like any other loan borrowed from a financial institution except they fill out an online application. The principal amount is paid back along with interest accrued over a period of time.
This option has started to make a lot of financial sense for some business owners since it is cheaper and easier. Many business owners are already using the method to get the money needed to expand and pay ordinary expenses and the day-to-day operation for their business.
Another unique aspect of P2P lending is that even if you have a poor credit history, you will still get approved. With most Peer-to-Peer lending platforms, people actually manage to bid on their loan proposals.
Have you heard of collective student funding? This new form of student funding is just emerging. It is based on peer-to-peer lending, also know as collective lending, social lending, and micro lending.
P2P student loans involve collective funding where many investors contribute small amounts of funding to reach the borrowers required amount of loan.