Why People Use Peer to Peer Lending
Peer to peer lending refers to people borrowing from others, their peers, instead of banks or credit unions. Peer to peer lending, also called P2P, lending has been increasing in popularity for several reasons. Let's look at several of the reasons why.
Reasons for Using Peer to Peer Lending
- Lending from peers can be based on reputation but is always independent of credit score. For those just starting out their financial lives, borrowing from peers may be the only form of borrowing available to them.
- Peer lending generally offers much lower interest rates than credit card debt. This is why many turn to P2P lenders instead of using credit cards.
- Peer to peer lending may be the only way someone could borrow a small, "microloan" amount or after bankruptcy.
- Peer to peer loans can be used to replace or in place of personal loans. Banks rarely loan money to someone to pay off their parents or friends. Peer lending networks, however, can provide funds to pay off personal loans.
- Personal loans can be run through peer lending services. This removes the awkwardness of a relative or friend demanding periodic payments.
- P2P also gives the lender a means of enforcing collections through the peer lending website if not paid. For example, if the borrower ends up filing bankruptcy, the P2P loan information provides proof for the lender that the debt is owed and thus must be included in the bankruptcy repayment plan.
- Peer lending services also allow someone to receive a majority of the funds from a relative or friend while using the peer lending service to provide the remainder of the funds for a project. One person can front $5,000 through the peer lending service while others bid to lend the remaining thousands of dollars for the project.
- Peer lending services simplifies the loan management for the borrower, since they only have to make one payment to the peer lending service to pay all of those who loaned them money.
- Because peer lending offers higher rates of return than high yielding savings accounts, peer lending is an avenue of making money.
- Since peer lenders can front very small amounts of money to many borrowers, lenders can diversify their portfolio and lower their risk compared to loaning one friend a large sum of money. Those who want a higher return on their money can reduce the risk by loaning $5,000 to a friend and $500 to ten other people to reduce the risk of default relative to the odds a borrower defaults.
- Peer to peer lending online lets borrowers tap into social networks far larger than their immediate community. For example, a borrower could promote a business idea and small investments in the loan from hundreds of people around the country instead of trying to convince several dozen local lenders to give them a small amount of money.
- P2P lending websites can be set up to automatically deduct funds from someone's bank account and transfer monthly payments to the lenders. This is far simpler than trying to write a check each month to each lender and generates a third party paper trail that is invaluable if the loan repayment lands in court.
- Peer to peer lending can be coupled with coupons and discounts with a startup, allowing new business ventures to engage potential customers while gaining startup capital.
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