Peer to peer lending is a network that allows individuals and businesses to borrow from other individuals, without involving any financial institutions and banks. It’s a way of lending (and borrowing) that doesn’t involve the hassle and complications required in a bank loan. Peer to peer lending is mostly done online, which automatically makes it costs less than that of a bank, which is not just online. This is also means that because of lower costs, peer to peer lending services are provided at a lower cost than traditional bank services. It is much easier to borrow and lend money in the peer-to-peer network than through a bank for a number of reasons.
One of the reasons being that bank loans require a good credit score in order for someone to be able to borrow a sum of money. They have a credit score for all types of lenders and borrowers. Most of the time many individuals and small business and start-ups can’t have a good credit score from day one. This is where peer to peer lending comes in to make things easier for such individuals and banks. Peer to peer lending doesn’t take into account the credit worthiness of people. Peer to peer loans are great for personal loans as people lending are very cooperative and don’t take into account your credit worthiness. However, this could be a bad thing considering many people take advantage of this and this leads to bad debt too. But most of the time people involved in this do pay back their loans.
Bank loans require high interest fees to be paid on the loans, especially when making a big loan. Banks also have a fixed interest fee. Whereas in peer to peer lending, most of the time lenders set a fee and people bid on it and the highest bid gets the loan. This auctioning takes place online. Banks have a lower interest fee than that of peer to peer lending as banks can afford to have a low interest fee but peer to peer lenders can not.
To take loans from banks, people usually have to go there in person and banking hours are fixed. With peer to peer lending, everything is online so people can lend and borrow from the ease of their home.
Bank loans also have collateral involved such as a car but can also be unsecured. Peer to peer loans are however unsecured loans. This is known as crowd lending. This is a disadvantage for a lender, as they don’t have a security for the money they have lent. Peer to peer is riskier for lenders than borrowers as lenders choose to diversify their investments by lending to different borrowers. Some of their loans might get security from the government but most of them don’t so there always runs a risk of bad debt. Peer to peer loans have evolved and most people are choosing this network over banking. All kinds of loans can now be taken through this network including medical, real estate and student loans.