This post will describe all basic understanding about P2P lending. There are two approaches to the concept of peer-to-peer lending in the scope of funding. So, this post is going to explain how P2P lending works for a borrower or a lender or investor.
However, whether you are a borrower or a lender in a peer-to-peer lending case, both of them will provide benefits for you in financial matters.
Indeed, this P2P Lending system isn’t without risk, just like other financial activities, you have to be careful in running it. However, as long as you understand the P2P system, how peer-to-peer lending works, and various other related things, you will be fine. The following are all the things you need to know about peer-to-peer lending.
What is Peer-to-Peer Lending?
Peer to Peer Lending or P2P Lending is the practice of lending money to individuals or businesses and vice versa, applying for loans to lenders, which connect between lenders and borrowers or investors online.
This way of lending allows everyone to give loans or apply for loans with one to another for various purposes without using the legal financial institution’s services as intermediaries.
Basically, the P2P Lending system is more or less similar to the concept of an online marketplace, which provides an online portal as a meeting place between buyers and sellers.
In the case of P2P Lending, the existing system will bring together the borrower sand those who provide loans. So, it can be said that P2P Lending is a marketplace for lending and borrowing money.
Rather than applying for loans through official institutions such as banks, cooperatives, credit services, government and other types of financial institutions which the process is far more complex, as an alternative, people can apply for loans that are supported by fellow lay users of P2P Lending systems; and therefore it is called “peer-to-peer”.
How Peer-to-Peer Lending Works
1. As a Borrower
As a borrower, all you have to do is upload all the documents needed to apply for an online loan (which is relatively faster than any other conventional loan process), which includes documents containing your financial statement within a certain period of time and your goals for the loan.
Your loan application can be accepted or rejected depends on various factors. If your application got rejected, then you must correct everything that becomes the reason for the lenders rejected your loan application. For example, you need to improve your credit score.
Then, if your loan application got accepted, the loan interest rate will be applied and your loan application will be entered into the available marketplace so that all lenders (the loans network) can see your loan application.
2. As an Investor
As an investor or lender, you have the access to browse loan submission data on your dashboard that has been provided. You also certainly can see all the data regarding each loan application, especially relevant data about the borrower such as income, financial history, the purpose of borrowing (business, health, or education) along with the reasons, and so on.
If you decide to invest the loan, you can immediately invest a number of funds after making a deposit according to your investment goals. Then, your borrowers will repay the loan every month and you will get profits in the form of principal and interest. The interest rate will depend on the loan interest rate invested.
Is Peer-to-Peer Lending the Right Loan System for You?
Admittedly, this will certainly depend on your financial needs, both as a borrower and for investors. The good thing for borrowers, peer-to-peer lending is the right way for people who want to get a quick personal loan.
And the good thing for the investor is that if you have more funds to be allocated but don’t know where to invest, peer-to-peer lending is a very good option for your investment.
The Advantages and Disadvantages of P2P For Borrowers
- One of the biggest benefits of P2P Lending for borrowers is a low-interest rate compared to the interest rate set by an official financial institution, for example, a bank.
- Conversely, personal loans may have an interest rate of between 12-20% from financial institutions, that is still lower than credit card bills. While loans from P2P Lending have lower interest rates.
- Another advantage is that the loan application process is not as formal as when applying for a loan at a financial institution such as a bank.
- The process is much faster and easier. In addition, you don’t need excessive conditions that must be met so that your loan is approved.
- However, if you have a bad reputation about financial loans, you can explain the reason behind why it happened.
Besides, you can also apply for a loan for any reason as long as there is someone who will invest the money.
- Finally, P2P Lending is a collateral-free loan, which means that no guarantee is needed at all.
- P2P Lending loan rates soar up when your creditworthiness falls. If you pay late, the bill will be very significant, where if you fail to pay your loan, the amount to be paid later can skyrocket.
- Loans are only suitable for the short term, because the longer the loan period, the bill will continue to rise.
- It is possible that your loan fund needs can be met as a whole, but there is no guarantee that all loan applications will be fulfilled.
- Suppose you need a loan of $100,000, and if only 75,000 is fulfilled, it means your loan application fails and the funds that have been collected will be returned to the investors.
The Advantages and Disadvantages of P2P Lending For Investors
- P2P Lending has been officially regulated and supervised by the Financial Services Authority (FSA) through one of FSA’s regulation.
- Providing loans is very easy and fast through a P2P Lending system, especially if you have more funds but don’t know where to allocate them.
- The interest rates on loans received have a significant value, making them more profitable.
- Providing loans through the P2P Lending system also makes it easier for you to diversify your investment, thereby increasing the opportunity to reap greater profits.
- If you invest money through a P2P Lending system, you cannot withdraw the money you invest whenever you want. It isn’t like depositing your money into a bank.
- Just like on other lending systems, there are possibilities that your borrowers will fail to repay the loan so that the funds you loan can dissolve. But this kind of issue has been overcome by the majority of peer-to-peer lending platforms with some guarantees given to you as lenders.