Often, people catch a situation when they force to borrow money, maybe for some medical procedure or bankruptcy issue. At this point, availing of a loan is the best option available. But then, for various reasons, instead of availing a bank loan. Most of them give a shot to arrange the money from their near and dear ones themselves. But, what is the guarantee? This trick would always show up. So, going to a better professional and formal concept. Basically borrowing money from peers with a proper interest rate and contract. And that too available at the tip of the finger, is the way out. This is exactly what use to happen in traditional ways before the establishment of national banks. Following this concept as the foundation and making a transition to online mode was developed peer-to-peer lending.

What is peer-to-peer lending?

Peer-to-peer lending refers to the concept in which the individual who needs money can directly borrow the money from another individual, avoiding the financial intermediaries and cutting short the time taken for the transaction. In this way, the tedious procedure of the money being sanctioned by the intermediary or middlemen can be avoided. Thus speeding up the process. P2P individual lenders or investors are the ones who prefer better return on cash savings than on bank savings. The concept of peer-to-peer lending was introduced in 2005, but several websites are facilitating easy-going P2P lending. It is also referred to as social lending or crowdlending. The P2P lending websites connect the borrowers with the lenders. And fix the rate and terms of the transaction depending on the borrower’s creditworthiness.

Working on the P2P platform?

• The first step is for the investor to register himself with the website of his choice, as in the website that provides him with the best deal and the best returns on cash.
• In the next step, the investor needs to specify a certain amount of money that he can disperse as a loan.
• Then the applicant needs to build his financial profile and post that would be associated with a certain category of risk. Thus different interest rates would be charged depending on the creditworthiness.
• The loan applicant will have the complete freedom to view all the offers and select anyone who best suits his requirements. And provides him with the best deal.
• The applicant will always evaluate and compare the offers of loans available based on the interest charged. The amount available, period and guarantee, and an offer of easy repayment. At the same time, the investor would always look for the opportunity to find the best returns on his cash savings. And also guaranteed repayment apart from wanting high-interest rates for the borrower.
• The applicant will also have the discretion in choosing multiple offers. Ensuring that they break up their requests into chunks and borrow from different lenders. This helps them ensure that a lesser amount is borrowed from each, which helps in easy repayment and facilitating the surety of being granted a loan.
• In this peer-to-peer lending procedure, the money transfer and guarantee of timely payment is handled through the platform itself. This process can be manual that is personally looked after by the parties involved or completely automatic.

Advantages of P2P to the borrowers:-

1. The ones availing through P2P lending will be eligible to have the loan in a convenient and fast manner. The online procedure means it can be carried out quickly and that too with a lot of ease. The websites already have a list of the investors or lenders from which the borrower needs to choose. the offer suitable to him, and once chosen, it is a very handy process that can take place within a few hours.
2. With peer-to-peer lending, the borrowers can avail themselves of very low-interest rates by having good credit points or scores, that is, creditworthy. For those who want lower rates compared to traditional banks and other financial institutions. P2P lending is perfect, as the money is directly coming from the investors to lenders without any intermediary and overhead costs.
3. When someone avails for a loan through a reputed P2P lending website. The loan comes directly from investors to borrowers, unlike any bank. But just like the banks, in this mode, the website or the platform plays the intermediary with negligible extra charge and deal with. And handle the entire procedure of multiple loans coming from various investors. Thus, one need not contact the investor or investors in case of any trouble or problems faced.
4. P2P loans are very flexible and are unsecured loans. Therefore, the process is also uncomplicated and quicker because there is no need of attaching any personal assets. As collateral like it is needed in any other traditional bank.

Disadvantages of P2P to the borrowers:-

1. One drawback of the peer-to-peer lending procedure is that there would be a credit check apart from all the ease of getting through. The ones who have good credit points will be at their best. But on the contrary, it will be tough for people with a poor credit score. As they will be charge interest even more than the traditional banks. There will also be underwriting stuff happening to protect investors’ funds.
2. P2P lending platforms make the loan availing procedure super easy and quick that too unsecured for the borrowers. But for this service, most of the website charges an arrangement fee for the same.

Cautions while transaction:-

One must be very sure about the tits and bits while planning an investment or any transaction of financial nature. This is wrongly carr out would have an adverse impact. All peer-to-peer lending websites paint a very good picture of their security but should be carefully examined before being trusted. The important points to be taken into consideration while getting involved in this is:-

1. The investors who decide to join peer-to-peer lending should be very careful and have a thorough check about the default rates as in conventional banks.
2. The applicant and the investor deciding to join a website promoting P2P lending should have in-depth knowledge and analysis of the instructions, terms, and conditions prescribed by the certain website. This includes checking the fees on transactions.
3. Every website has its own goals for making a profit, making money. But more or less, each of them might charge fees and commissions on the lenders or borrowers or maybe both.
4. The applicant should also be aware that these websites sometimes also charge loan origination fees, bounced payment fees, and late fees like other conventional banks or financial institutions.

Conclusion:-

Over the years, the P2P procedure has evolved immensely from offering credit access to people who could not afford conventional institutions. And providing student loan debt at a favourable interest rate to expand its market-wide and targeting the credit card debt payers offering low-interest rates along with getting engaged in the auto financing and home improvement loan avenues. The past decade has witnessed the exploration of various profitable avenues and provides people with good credit scores and lower interest rates than the banks. Pandemic even strengthened the development of the peer-to-peer lending procedure as there was a drastic transition to online mode.

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