To run a business, an owner often needs extra capital. In that regard taking help from banks or credit unions is not always a good option.
To fulfill the need for money there is the best alternative option is known as Peep-to-Peer (P2P) lending. Over the last few years, peer-to-peer lending has raised its popularity.
What is Peep-to-Peer Lending?
Peer-to-peer lending practice allows the individual to borrow capital directly from another individual without involving a financial institution as a middleman in a deal. It is an alternative method of financing that is mostly done through online platforms or websites.
The marketplace that links borrowers to lenders is known as the P2P platform. It is a mandatory policy for the investors and money receivers to register them.
“Social Lending” or “Crowd Lending” is an alternative name for P2P lending. This debt financing involves two parties, the first is the one who wants the loan, and the second, is the people who want to invest.
Working Procedure of Peep-to-Peer Lending
Peer-to-peer financing has efficiently taken over the traditional banking system. The traditional banking procedure requires a lot of paperwork whereas in P2P borrower takes a loan directly from investors quite conveniently.
The lender and capital borrower are required to open the account after completing the online application and submit pre-agreed charges.
Peerform, LendingClub, Upstart, Prosper, Funding Circle, and Payoff are the top-rate online platforms for P2P lending transactions.
The P2P lending online sites set the terms, and rates, and then legalize the transaction. The lending takes place after paying small charges to financing websites.
These marketplace websites provide important financial information to interested individuals such as;
- Maximum or minimum capital a person can borrow
- Minimum recommended credit score
- ARP range
- Fees to pay
- Requirements of Eligibility
- Repayment terms
- Schedule of fund receiving
- Restrictions, etc.
On the P2P platform, the investors have access to the profile of borrowers. This help in deciding whether they want to lend money or not.
The final agreement is done after finalizing the interest value, repayment term, and other important terms & conditions.
The lending websites support both parties but they don’t take responsibility beyond the predefined policies.
How & Why Peer-to-Peer Lending Beneficial for Individuals?
Crowdlending is a good fit for people who do not qualify for conventional investors or brick-and-mortar banks.
It is considered the easiest way of financing as the borrower receives the loan in the shortest time. The borrower gets the best attractive premium rate.
The right usage of this funding can propel the business forward in less time and enable the owner to leverage capital in a sufficient period.
It boosts the investment portfolio and builds a positive reputation in the market. This financial dealing is more feasible for small businesses that don’t have a large budget for repaying interest rates to the banks.
Advantages of Peer-to-Peer Lending
P2P lending is an amazing financial tool for people who need funds to develop businesses. The alternative source of financing has several major benefits;
- The lender gets to receive a relatively high-interest rate by investing money in comparison to saving them.
- The loan taker gets hassle-free capital at a lower prime interest rate. The interest rate is better compared to traditional bank offers.
- Compensating capital in case of default by the borrower.
- Easy access to the funds.
- Full authority over lending the money or not. It is up to the lending party if they want to full loan or some portion of the requested amount.
- The interest obtained from P2P lending is incorporated into a personal saving allowance.
- Due to the flow of income, the economy stabilizes.
Disadvantages of Peer-to-Peer Lending
Peer-to-peer is immensely beneficial for loan borrowers and lenders but it has some drawbacks as well;
- These financial transactions could be unsecured as there is no government guarantee.
- The interest obtained through the P2P method is taxable. The individual is required to declare interest earned in the yearly tax return.
- Huge risk factors are involved if the borrower does not repay the money.
- Insecurity due to any hacking or cheating through online websites.
If you don’t want to borrow money from banks then the peer-to-peer option is worth exploring. P2P financial lending is a great solution for people who want to take loans at low-interest rates.
It is recommended to research and take financial consultancy from legal advisors to make the best borrowing or lending investment.