Peer-to-peer lending and borrowing is a system where no banks or financial institutions are involved in the process. Regular people or “peers” participate in this system where they lend their funds as loans to earn interest on them or look to borrow funds while paying the interest. Peer to peer lending has become really popular as an alternative and easier way of financing. Instead of dealing with the complications of the banking system, people are turning to peer-to-peer lending and borrowing, as there is little to no involvement of banks or financial institutions in this. Peer-to-peer lending also offers student loans, real estate loans, leasing and other forms of business loans and payday loans.
Small businesses turn to peer-to-peer lending for the advantages it offers. For new start up businesses and small businesses, getting loans is very hard due to the credit terms these days. Financial institution lend to either businesses with a great credit record or big businesses. Peer-to-peer lending facilitates these small businesses by offering them loans when they don’t have much of a great credit status or lack of a good credit record.
Furthermore, peer-to-peer lending is a quick and easy process. Due to swift decision making by the investors, the loans get funded relatively quicker. The application procedure is simplified as well.
Small businesses and start up businesses can borrow at low rates using peer-to-peer loans and this benefits them. However, due to these low interest rates being set by lenders, businesses have to compete for them and sometimes miss out on the lowest rates. These rates are still lower and better than the conventional rates banks and other financial institutions have set. For people who don’t want to lend their funds to the banking system because they are socially conscious, they choose peer-to-peer system and lend their money to new start up businesses who need it or small businesses that they believe will be a good investment.
Peer-to-peer lending ensures the confidentiality of your personal information as well. Just like any other financial institution or bank, both the client’s and borrower’s information is safe and protected with no risk of leakage. Financial institutions usually share the important information with other institutions but in peer-to-peer neither the investors nor lenders require all information so only the relevant information shared amongst them.
Lastly, peer-to-peer is very reliable as the network is widely spread and doesn’t depend on anyone institution like banks depend on central banks.
However there are cons to this system too. People might not pay back the loan as there is less bureaucracy involved and investors can be left with no way to get back their funds if this keeps happening. Plus, even with peer-to-peer lending, some kind of credit history or assurance is required from the investors that the borrower will pay back. However, there are more pros than cons involved and its beneficial for small and start up business to engage in peer-to-peer lending and borrowing.