Updated July 10, 2023
What is Peer to Peer Lending?
The term “peer-to-peer lending” refers to direct lending to businesses or individuals without the intermediation of any official financial institution. This lending is usually made through online platforms where a borrower is mapped to a potential lender.
Although it offers both secured and unsecured loans, most of the lending is unsecured. Typically, peer-to-peer lending is considered an alternative source of financing.
Characteristics of Peer to Peer Lending
Some of the unique characteristics are as follows:
- First, most of these peer-to-peer lending transactions occur through online platforms or websites.
- There is no need for existing relationships or common bonds between borrowers and lenders to execute transactions. For example, two unknown individuals may come together for a lending transaction.
- Many lending platforms offer lenders the option to choose which borrowers they want to invest.
- Although they offer both secured and unsecured loans, most are unsecured, and there are no government guidelines to protect these transactions.
- The borrowers are benefited from the relatively lower interest rates compared to traditional financing.
- The lenders earn higher returns than a savings account but are exposed to the risk of loss.
- Since there isn’t too much intermediation, these lending transactions are both time and cost-efficient.
How to get a Loan Through Peer to Peer Lending?
It follows a fairly simple process wherein all the transactions are made through an online platform. The following steps are involved:
- An interested borrower completes the online loan application form and submits it on the lending platform.
- The platform evaluates all the information provided in the application and determines the associated risks based on the applicant’s credit rating.
- The applicant is assigned an appropriate interest rate based on the credit rating.
- Once approved, the applicant is offered options based on the prospective lenders’ quoted interest rates.
- Finally, the applicant can appraise the given options and select the one that suits them.
Eligibility Criteria
Any business or individual needing funds can avail of the benefits of peer-to-peer lending. However, this loan instrument is mainly designed for people from low-income groups or with low credit scores who find it difficult to get other forms of loans. Nevertheless, the final lending decision rests with the lenders, which means the eligibility criteria can vary from one lender to another based on their risk appetite.
Platforms facilitating Peer to Peer Lending
The following are some of the top platforms globally that facilitate it:
Peerform
Founded in 2010, Peerform provides loans to applicants with excellent credit scores who can enjoy interest rates as low as 5.99%, but the maximum amount of loan that can be borrowed is only $25,000.
- Maximum & minimum amount: $4,000 to $25,000
- APR: 5.99% to 29.99%
- Minimum credit score: 600
- Repayment period: 3 to 5 years
Upstart
Founded in 2012, Upstart has been involved in the origination of more than $7.8 billion of consumer loans. It lends based on education and employment history, even to those applicants with sketchy or limited credit history.
- Maximum & minimum amount: $1,000 to $50,000
- APR: 3.22% to 35.99%
- Minimum credit score: 600
- Repayment period: 3 to 5 years
Funding Circle
Founded in 2010, Funding Circle has more than 100,000 investors and has lent to nearly 90,000 small businesses. It usually prefers to extend loans to entities with at least three years of operations.
- Maximum & minimum amount: $25,000 to $500,000
- APR: 11.29% to 30.12%
- Minimum credit score: 660
- Repayment terms: 6 months to 5 years
Advantages
Some of the major advantages are as follows:
- Generally, this lending generates higher returns for investors than other forms of investment.
- For borrowers with low credit scores or other typical loan issues, this is a more accessible funding source than conventional loans from financial institutions.
- Due to huge competition between the lenders, the borrowers are offered relatively lower interest rates.
Disadvantages
Some of the major disadvantages are as follows:
- Peer-to-peer lenders are always exposed to high credit risks because most borrowers possess low credit ratings, indicating a higher probability of default.
- The government doesn’t guarantee or protection of any form to the lenders if the borrower defaults.
- Some jurisdictions don’t allow peer-to-peer lending or enforce strict regulations on them.
Key Takeaways
Some of the key takeaways of the article are:
- Peer-to-peer lending refers to direct lending to businesses or individuals without the intermediation of any official financial institution.
- Investors interested in higher returns usually get involved in such lending transactions.
- The borrowers with low credit scores seeking an alternative funding source opt for peer-to-peer loans.
- Most of these are unsecured loans, and there are no government guidelines to safeguard these transactions.
Conclusion
So, it can be seen that peer-to-peer lending offers a convenient lending medium for borrowers with weak credit profiles. Given that most of these loans are unsecured, the lenders should assess the borrowers’ credit history and decide the terms & conditions accordingly before venturing into one. However, it is a win-win proposition for lenders and borrowers if executed in good faith.
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This is a guide to Peer to Peer Lending. Here we also discuss the definition, characteristics, and how to get a loan with eligibility criteria and platforms, along with advantages and disadvantages. You may also have a look at the following articles to learn more –
