Person-to-Person Lending

Joey, a small business owner, was looking to expand his business, and, for this purpose, was looking for loan options with traditional banks. However, he faced difficulties securing loans due to a lack of collateral. That’s when Joey turned to P2P lending platforms. But, what is P2P lending?

P2P lending or Person-to-Person Lending is a form of lending money directly to individuals or businesses without an official financial institution participating as an intermediary. P2P lending is usually done through an online platform. A potential borrower interested in obtaining a loan completes an online application that helps determine the risk and credit rating of the particular borrower. Based on this, the potential borrower is assigned an appropriate interest rate. Finally, once the application is approved, the potential borrower is given various loan options offered by the investors on the platform and chooses the loan option best suited to them. The potential borrower is liable to make interest payments monthly and pay the principal amount on maturity.

P2P lending platforms are a more accessible source of funding as compared to other lending options that are offered by financial institutions. While financial institutions may not approve loans to borrowers because of a lack of collateral or a low credit rating, P2P lending platforms make it easy for individuals or businesses to avail of loans. Furthermore, P2P platforms provide lower interest rates. 

However, P2P lending does come with its disadvantages. Individuals who wish to lend money on a P2P platform need to consider the possibility that the borrowers may default on the repayment of their loans. Furthermore, the government does not provide any form of protection in case the borrowers default on their payments.

The bottom line is while P2P lending platforms make it easy to borrow money or for one to invest money, one must know the risks associated with P2P lending.