What Is Peer-to-Peer (P2P) Lending?
Investopedia states Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman. Websites that facilitate Peer to peer lending have greatly increased its adoption as an alternative method of financing.
Since 2005 P2P lending is also famous as “social lending” or “crowdlending.” It has really new things, but the crowd of competitors already includes Prosper, Lending Club, Peerform, Upstart, and StreetShares.
Understanding Peer-to-Peer Lending
P2P lending websites connect borrowers directly to investors. Each website sets the rates and the terms and enables the transaction. Most sites have a wide range of interest rates based on the credit worthiness of the applicant.
As well as investors open an account on the site and deposit some money in the form of loans. The loan applicant posts a risk category financial profile that determines the interest rate the applicant will pay. The loan applicant can review offers and accept one. (Some applicants break up their requests into chunks and accept multiple offers.) Money transfer services and monthly payments can be made directly through the platform. The process runs automatically, or lenders and borrowers can choose to haggle.
Some sites specialize in particular types of borrowers. StreetShares, for example, creates for small businesses. Moreover, Lending Club has a “Patient Solutions” category that links doctors who offer financing programs with prospective patients.
Special Considerations
People who are considering joining a P2P lending site as investors need to worry about default rates, as do conventional banks. Zopa had a default rate of 4.52% for loans granted in 2017, according to the Financial Times, with other sites forecasting similar default rates. An S&P/Experian composite index of default rates across all types of lending to U.S. borrowers has been fluctuating between about 0.8% and 1% in the period from April 2015 to December 2019.3 The default rate on U.S. credit card debt fluctuates much more, hitting a high of 9.1% in April 2015 but dropping to 3.56% in mid-2018, according to Market Watch.
Furthermore, Any consumer or investor considering using a P2P lending site should check the fees on transactions. Although every site makes money differently. Fees and commissions have to pay to the lender, the borrower, or both. Like banks, the sites may charge loan origination fees, late fees, and bounced-payment fees.
