What is peer to peer lending?
Peer to peer lending basically get rids of the traditional financial institution as the middleman in lending money, and matches borrowers with lenders directly through the use of one platform. These online platforms are able to match borrowers and lenders without incurring so much cost for the borrower (due to lower operation costs) and allowing profits for a lender. In the past, borrowers went to a financial institution to borrow money. The financial institution had available money because it was either a bank or a company with vast amounts of private capital. But today, for the borrower ready to take the online step, online platforms exist that match the lenders and borrowers directly with each other, and take smaller cuts from these processes as forms of commission to operate their online service.
Is peer to peer lending a good thing?
Peer to peer lending can be a great form of income for lenders because it can work as an alternative to general investments with its higher interest returns. For a borrower, the advantage is access to finances they might not usually have received (the lender decides the risk they are willing to take on), and cost savings on traditional fees.
There are some aspects to peer to peer lending that can cause disadvantages though. The first is that of the risk the lender takes on in lending money to a borrower with a certain risk profile. Fortunately, many online services that offer the platform for peer to peer lending, have insurance to offer cover against these risks.
What’s in it for borrowers?
Borrowers that are leaning towards a peer to peer lending online service can look forward to these advantages:
- Approved applications that were turned down by banks or other financial institutions
- Better interest rates
- A simpler, user-friendly process that is more private
- Cheaper fees
- Transparent fees
- Free credit scores
- Flexible loan offers
How peer to peer lending works
Peer to peer lending is a simple process due to the advances of online technology. One could call it online loan dating, but, like any online dating game, it can get messy if not understood. The basic process of how peer to peer lending works is as follows:
- An online service exists to offer a peer to peer lending platform on which lenders and borrowers can find each other.
- Potential borrowers and lenders create an online account on the online service or platform.
- Borrowers will request a loan amount on their own terms (interest and repayment terms).
- The loan application is screened for approval by the online service team.
- After approval, the loan application is covered by a community of lenders that are willing to meet your terms.
- The online service covers all the nitty gritty aspects that usually make the loan application and approval process so tedious.
Tips on using peer to peer lending as a borrower
As a borrower, peer to peer lending might not offer as much risk as to a lender, but there are still some basic considerations to keep in mind when using a peer to peer lending platform like Rainfin or Lendico.
Do your research on offerings from a lender to make sure they are reputable in having reviews from past dealings or have a professional lending profile.
Where possible, compare the interest rates you have received to industry averages and other lender’s offers to make sure you aren’t being taken for a ride. Once you’re commitment to a loan contract, it might be too late to get yourself out of skyrocketing interest rates on your repayments.
Fees and charges
Fee structures will vary between different online peer to peer lending platforms. Do your research on each before deciding on which platform to ask for a lender.
It’s important to check the safety measurements that are in place for the platform you are going to use since it will store financial and personal information that you view as private.
The companies covered in our peer to peer lending platform comparisons work along the same processes, but it is great to view each company for its unique ways of approaching peer to peer lending. After this, you can come back to the Fincheck comparison platform and choose the platform ideal for you.