Peer 2 Peer Lending Advantages Disadvantages

 Peer 2 Peer Lending: Advantages and Disadvanatages

Peer to peer lending is beneficial for people who need loans, and people who are striving to make money. Its access and reduced restrictions allow both lenders and borrowers to meet each others needs. Just like other businesses, peer-to-peer lending has its downsides.

Peer-2-Peer Lending

What is P2P lending?

Peer-to-peer lending (P2P) is a financial agreement between lender and borrower. The practice entails lenders giving leasing funds to borrowers at a given rate through an online platform, without the intervention of financial institutions that do offer financial security.

How does it work? A borrower applies for a loan through a P2P platform. Here they provide their financial details to acquire the loan. The platform then matches the borrower with a lender or private investor. The borrower and lender do not make contact throughout the process.

Some of the most common platforms include platforms like the Lending Club, Peerform, Upstart, Prosper, Funding Circle and Payoff.

Is P2P a Safe Financial Investment?

Even though P2P loans are intended for individuals and businesses. This is not a safe financial investment. And since the government will not protect your money, a P2P loan is an unsecured loan.

Therefore, this particular type of investment is for individuals who are wealthy. Typically, a group of wealthy investors put their funds together for either a medium or long term project. The funds are held by the individual who initiated the project or a financial management group.

Advantages of Peer-2-Peer Lending

As noted, peer to peer lending has proven to be one of the best resources for borrowers. Individuals can get loans much quicker. More importantly, people have a better chance to obtain a loan through P2P.

But to obtain a loan from a traditional financial institution, credibility and the consistency of transactions have to be monitored. Therefore, loan-awarding is not guaranteed. Peer-to-peer lending platforms usually offer loans at a favorable interest rate than financial institutions. Nevertheless, lenders are about to attain higher profits than their financial counterparts. Here are a few other advantages;

  • Profitability - The lenders normally set favorable interest rates for their funds on the basis of the risks involved. Their interest rates are usually higher. Upon repayment from their borrowers, they usually get more profits.
  • Easy access - The platforms are easily accessible, as they do not have strict regulations as the traditional financial institutions. Transactions are always done through an online platform.
  • Lower interest rates - Some platforms do have lower interest rates to suit their clients.

Before you invest in this opportunity, it is important to make sure you are prepared for what comes with it. In other words, you need a back up plan in case things don't work out.

Disadvantages of Peer-2-Peer Lending

Just like other businesses, peer-to-peer lending has its disadvantages. For beginners, peer to peer lending is not offered financial security by most traditional financial institutions. Most of them are insecure. Consequently, lenders are faced with complications. More specifically, the possibility of borrowers not repaying the loan.

To minimize the losses, most institutions and platforms usually track the borrower’s financial history. This enables them to check on the credibility before awarding a given amount. Additionally, some broker institutions have also been set up to provide financial security to the lenders. Other disadvantages include:

  • Credit risk - The process usually entails much risk to the lenders, as the borrowers may default their payments. More importantly, there are no guarantees that the borrower's loan payment will be made.
  • Lack of insurance - The platforms do lack financial security from the traditional financial institutions. Therefore, incurred losses are to be bailed up by the investor.
  • Legislation - In some jurisdictions, P2P lending is considered illegal. For this purpose, its essential to conduct a PEST analysis (political, environmental, social, technology).

To sum things up

Given the information, peer to peer lending has it's advantages and disadvantages. But, with the right strategy, this investment can be extremely beneficial. Developing a solid strategy will enable you to minimize your risks. At the end of the day, "there's no reward, without a risk".

Post a Comment