Peer-to-peer lending, also known as P2P lending, is an alternative investment option that is revolutionizing the traditional banking system. P2P lending is an innovative technology that allows individuals to lend money directly to other individuals or businesses, bypassing traditional financial institutions. In this article, we will discuss the five main benefits of investing in peer-to-peer lending, as well as the top three options for those looking to get started.
What Is Peer-to-Peer Lending?
P2P lending is a form of alternative finance that connects borrowers and lenders directly. The idea behind it is very simple – instead of borrowing money from banks or other financial institutions, you can borrow money directly from private individuals. This method of lending has been around for a long time, but it has only recently become popular due to the Internet. P2P lending is a form of alternative finance that connects borrowers and lenders directly. It is also known as social lending or person-to-person financing. P2P lenders act as a matchmaker between borrowers and lenders, helping them to find each other in an efficient and effective way.
How Does P2P Lending Work?How Does P2P Lending Work?
The process begins with a borrower setting up an account on a P2P website or app and submitting an application for the amount they want to borrow. The borrower’s creditworthiness is then assessed by algorithms that calculate their risk profile based on various factors like income, debt levels and repayment history. Based on this assessment, potential lenders can view the loan request and decide whether they want to fund it or not. If the borrower is able to raise enough money, the loan is then disbursed and sent to their bank account.
5 Benefits of P2P Lending
P2P Lending offers a number of benefits to both borrowers and lenders. For borrowers, the biggest benefit is that they can access credit from individuals rather than a bank or traditional financial institution. This can be particularly helpful for borrowers who have had credit issues in the past. P2P lending may also be a good option for borrowers who want more flexibility with loan terms and repayment schedules, as well as those who need to make additional payments or pay off their loan early without penalty. For lenders, P2P lending offers the opportunity to earn better returns than they would through traditional savings accounts, CDs or stock market investments. Because peer to peer loans are unsecured and non-collateralized, it is difficult for lenders to get a higher interest rate on their investment.
- High Returns: One of the main benefits of peer-to-peer lending is the potential for high returns on investment. According to a study by the Cambridge Center for Alternative Finance, the average annual return for P2P lending platforms in the United States was 9.2% in 2018. This is significantly higher than the average return for traditional investments such as stocks and bonds.
- Diversification: Another benefit of P2P lending is the ability to diversify your investment portfolio. Instead of putting all of your money into one stock or bond, you can spread your investments across multiple borrowers. This reduces the risk of loss if one borrower defaults on their loan.
- Personal Loans: P2P lending platforms are also a great way to access personal loans. Many platforms offer loans for a variety of purposes such as debt consolidation, home improvement, and medical expenses. P2P lending platforms also offer lower interest rates compared to traditional personal loans.
- Disruption of Traditional Banking: P2P lending is upending the traditional banking system by offering a more efficient, cost-effective and transparent way of lending and borrowing money. This is especially helpful for borrowers who may not have access to traditional banking services or who have difficulty qualifying for loans from traditional financial institutions.
- Transparency: P2P lending platforms provide detailed information about borrowers, including their credit score, income, and employment history. This allows investors to make informed decisions about which loans to invest in. It also increases transparency and accountability in the lending process.
Risks of P2P Lending
Lending money to strangers online is a risky proposition. A borrower could default on his loan or even worse, file for bankruptcy and leave lenders holding the bag. Lenders must consider the possibility that their money may not be recovered. Because of these risks, investors should only invest in P2P lending platforms that have a proven track record and are backed by solid financial institutions. For example, Lending Club is a publicly traded company that has been in business for several years and is backed by Google Ventures and other institutional investors.
If you’re interested in getting started with P2P lending, there are several platforms to choose from. Here are three of the top options:
- Lending Club: Lending Club is one of the largest and most established P2P lending platforms in the United States. It was founded in 2007 and has since funded over $50 billion in loans.
- Prosper: Prosper is another popular P2P lending platform that was founded in 2005. It has funded over $16 billion in loans and is known for its easy-to-use online platform.
- Funding Circle: Funding Circle is a P2P lending platform that allows investors to lend money to small businesses. It was founded in 2010 and has funded over $10 billion in loans to small businesses worldwide.
In conclusion, P2P lending is an innovative technology that is revolutionizing the traditional banking system. It offers high returns, diversification, personal loans, disruption of traditional banking and transparency. If you’re looking to get started, Lending Club, Prosper and Funding Circle are among the top platforms to consider. As with any investment, it’s important to do your own research and consult a financial advisor before making any decisions.
- Cambridge Center for Alternative Finance. (2019). Global Alternative Finance Industry Report.
- Lending Club. (2019). Lending Club: A Decade of Innovation.
- Prosper. (2019). Prosper Celebrates 14 Years of P2P Lending.
- Funding Circle. (2019). Funding Circle: A Decade of Growth and Impact.