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What is P2P lending?

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asked Dec 23, 2015 in Investing by anonymous
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P2P Lending stands for Peer-To-Peer Lending. It is also known as social loans or consumer loans. Some even have begun calling it marketplace lending.


What It Is And How It Works


It is a type of unsecured personal loan that allows regular people to borrow from other regular people -- or peers -- through an online lending platform. The P2P lending websites acts as intermediaries or brokers between the two sides.


One one side is a borrower, seeking a lower interest rate on his loan, and on the other we have the investor who is willing to hand out money for this lower interest rate. The borrower has to pay less interest and the lender makes a profit -- and not the bank.



Different From Banks


The biggest difference is that you borrow money from a person or group of persons instead of a bank. This means that P2P systems allow for considerably lower interest rates on loans. As they are unsecured, one does not have to put up collateral and endanger one's property. Also, rates are fixed. Unlike with Credit Cards or bank loans, the rate will not suddenly change. Ever. Not even with late payments. In this context, even late fees are much lower and there are no penalties for prepayment. It is therefore a much more flexible and faster way to borrow money, particularly when it comes to smaller loans.


What Are The Requirements


There are certain requirements. P2P don't give out money to just anyone, although they are much more flexible and understanding as opposed to banks. To get approved for an unsecured P2P loan you often need to have at least a FICO score of 640 or higher. There are other aspects as well depending on the lending firm, but your credit score is the first thing they will look at.


Investing In P2P


With the bank cut out of the deal, peers can invest in P2P lending by putting up the money for borrowers. The lending firms and sites handle the fees and investment aspects, and one can earn a healthy minimum of 5-9% in returns. Therefor, money is better off in a P2P Lending firm than on a bank.



answered Dec 23, 2015 by AlecCorday (5,810 points)

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