Peer-to-Peer Lending: Borrowing Without a Bank
Alternative lending renders a helping hand to businesses that traditional banks make difficult. With alternative finance, you do not need long track records, collateral and the like. Individuals and organizations find it easier to fund their business from alternative lenders than from traditional banks because of the banks' formality. But it is also important to know that they lend money at a very high interest rate. Alternative finance includes invoice financing, crowdfunding and peer-to-peer loans, and it is faster, easier and flexible, with a very high tendency that your loan will be approved compared to other commercial financing organizations.
Peer-to-peer lending, also called social lending or crowdlending, is a debt financing method where individuals can borrow and lend money without using an official financial institution as an intermediary. They are loans made by individuals and investors, a particular set of people with extra money who offer to lend it to folks who require cash. It has been in practice since 2005. Peer-to-peer often involves more time, effort and risk than the general lending scenarios.
The peer-to-peer lending scheme has an online platform that connects the enterprise, the borrower, with the capitalist, the lender. Each party's need is met: the borrower sources money for the growth of the business, and the lender earns more on the money lent. The platform allows the borrower to choose the best from the varieties of options present. It is automated, matching the borrower to the lender, and both don't need to know each other.
Things to consider when opting for a P2P platform: verify whether the lender will attach penalties, and whether additional charges will be added to the loan. The borrower must be qualified before requesting a loan. And when you are in haste to borrow money due to some emergency, you need to note when the lender releases funds.
The advantages: higher returns to the investors than other investments; lower interest rates, because of the greater competition between lenders; and more accessible funding, which is more affordable than conventional loans for some borrowers, perhaps due to a low credit rating.
The disadvantages: credit risk, since many borrowers who go for peer-to-peer loans have low credit ratings that disallow them from obtaining a conventional bank loan; legislation, since some laws do not condone peer-to-peer lending or require the companies to comply with investment regulations; and no insurance or government protection, so lenders are not protected in any way.