Peer 2 Peer Lending Advantages Disadvantages

Peer 2 Peer Lending: Advantages and Disadvantages

Peer to peer lending, also known as P2P lending, has advantages and disadvantages. It is beneficial for people who need loans or entrepreneurs seeking to launch startups. Its access and reduced restrictions enable borrowers to access funds without too much trouble. By the same token, lenders earn up to 15%. If both the borrower and lender can meet each other's needs, P2P loans are profitable. However, if there are hiccups on either side, the process can become a nightmare.

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 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. Then the online platform connects the borrower with a lender or private investor, assuming the borrowers application gets approved. Next, the borrower signs a financial agreement. Usually, 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.

What is P2P Lending?

Is P2P a Safe Financial Investment?

A P2P loan is not a safe investment. Since the government will not protect your money, peer-to-peer loans are unsecure.

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 an amount.  In addition, brokers provide financial security to the lenders.

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. Even those with bad credit. In addition, most platforms usually offer loans at a favorable interest rate opposed to financial institutions.

But to get a loan from a traditional financial institution, credibility and the consistency of transactions have to be monitored. 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 based on 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. I always do transactions through an online platform.
  • Lower interest rates - Some platforms have lower interest rates to suit their clients.

You should be financially stable if you pursue this opportunity. Typically, people who are wealthy take advantage of lending simply because they can afford to risk the money. People who are lower and middle class can't afford setbacks mostly.

Disadvantages of Peer-2-Peer Lending:

Just like other businesses, peer-to-peer lending has its disadvantages. For beginners, peer-to-peer lending does not offer financial security by most traditional financial institutions. Most of them are insecure so lenders face complications like the possibility of borrowers not repaying the loan.

  • Credit risk - The process usually entails much risk to the lenders, as the borrowers may default their payments. 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 illegal. For this purpose, it's essential to conduct a PEST analysis (political, environmental, social, technology).

To sum things up

Given the information, peer-to-peer lending has its 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. Without risks, "there's no reward, without a risk".

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