What is peer-to-peer (P2P) lending?
Peer-to-peer (P2P) lending is a method of debt financing that allows individuals to borrow and lend without using a formal financial institution as an intermediary. Peer-to-peer lending removes the middleman from the process, but it also involves more time, effort, and risk than generic lending scenarios.
P2P lending is also known as social or crowd lending.
How does peer-to-peer (P2P) lending work?
Traditionally, individuals and small businesses looking to borrow money often applied to a person through a bank. The bank will conduct an extensive financial check of the applicant’s credit history to determine if the entity is eligible for the loan and, if so, to determine the interest rate that will be charged on the loan. . Individuals who want to avoid being charged high interest rates or otherwise be denied a loan application due to poor credit history, can choose another way to get a loan – peer-to-peer lending.
With peer-to-peer lending, borrowers receive loans from individual investors who are willing to lend their money at an agreed-upon interest rate. Borrowers’ profiles are often displayed on a peer-to-peer online platform where investors can evaluate these profiles to determine if they want to risk lending money to borrowers. A borrower can receive the full amount of the loan or only a part of what he requires from an investor. In the latter case, the remainder of the loan may be financed by one or more investors in the peer-to-peer lending market. In peer-to-peer lending, a loan can have multiple sources, and monthly repayments must be made to each source individually.
The P2P platform connects borrowers with investors with attractive interest rates. For lenders, loans that generate income in the form of interest can often exceed the amount of interest that can be earned through savings means, such as savings accounts. In addition, an investor can earn a higher return on his investment than he can get from the stock market through the interest payments he receives every month. from the borrower. On the other hand, P2P loans provide borrowers with access to financing that they might not otherwise get approval from standard financial intermediaries. Furthermore, a borrower gets a more favorable interest rate on her loan than on the loan she received from the bank.
P2P loan guarantee
Peer-to-peer lending is a form of crowdfunding that provides unsecured personal loans to individuals and small businesses looking to get student loans, commercial and real estate loans, loans by date, etc. luxury assets such as watches, jewelry, and fine art. However, as with traditional loan agreements, it is possible that the borrower may default on the loan. Since investing in a peer-to-peer loan is not backed by any government guarantees, the lender has the choice of who will fund the funds and has the advantage of diversifying the funds available among the borrowers. different loans.
Peer-to-peer intermediaries are for-profit companies that provide a matching platform between individual borrowers and lenders. Individuals and businesses that need to finance personal or commercial projects need to apply to these intermediaries to assess their credit risk, determine their credit rating, and apply interest rates to the application. their profile. Monthly repayments are also made through a P2P intermediary that processes and forwards the payments to the lenders who invested in the loan.
Peer-to-peer lending breaks financial boundaries
Social lending platform
P2P lending is the product of important business, technology and social trends, including:
A new generation of so-called “free people”Freeformers)” combines individual freedom with social activity. Freeformers want control over their work and play. Instead of working for one company for 35 years, they prefer to collaborate in networks for short periods on different projects. Freeformers are very suspicious of large organizations; they believe in people, not banks.
The dispersion of almost anything. Technological change, globalization and other international trends continue to reduce the number, size and role of business intermediaries in many industrial sectors.
The spread of web technologies, promoting “mass cooperation”. These new tools allow individuals to collaborate online in large groups to achieve common goals (Ebay and social networking sites like Facebook for example).
The development of microlending for individuals with few assets in poor countries. Community and socially minded lending institutions, such as credit unions, have been around for a long time. But microlending promoted the ideal of achieving social goals by making small loans to individuals.
P2P lending has many branches
Like most types of finance, there are many types of P2P lending. Furthermore, the legal issues surrounding P2P lending, particularly in the United States, are by no means resolved. Questions remain about the entity type of the P2P lender and what regulatory regime applies. Because of these concerns, the operations of foreign P2P lenders have sometimes gone beyond their original business models.
With these in mind, here’s how P2P lending works under the following scenario:
You sign up and become a member at the P2P lender’s website and the lender acts as an intermediary (it does record keeping, transfers funds between members, etc.). The lending company earns its revenue through fees charged to both the lender and the borrower.
Before you can borrow, the P2P lender does a number of checks (personal, employment, credit, etc.). Relatively strict standards and high credit risk make it impossible to borrow. Once accepted, you have two or more options.
The P2P lender will assign you to one of four or five risk categories, and you can borrow at an interest rate on your risk category on that particular date; or you can auction your loan to members who have money to lend. The lender / bidder sees the pertinent information you provided on the P2P lender’s website: why you need the money, your financial history, your personal story, even something. something more personal, like a photo or a poem you wrote. You set an open interest on your loan and accept a bid; If the loan is fully funded, the lender can bid down to the interest rate they are willing to charge to win the right to finance your venture.
As a lender, besides bidding on individual loans, you can also choose to have a P2P company distribute your funds to multiple borrowers. You decide the type of risk to lend; the more risk in your loan portfolio, the higher the return, but the greater the chance of default.
Advantages and disadvantages
The main benefits of P2P lending for individuals are:
Lenders can be returned many percentage points above the level for bank CDs; Borrowers enjoy a similar cost advantage over interest rates at a bank or credit union.
Many individuals want to know who they are lending money to and why they need the money. Not only does it give them a sense of personal satisfaction, but they can also choose borrowers they believe will repay the loan in full and on time.
There is a lending charity aspect. If a potential borrower has a dodgy financial history but a sympathetic story to tell, a lender may be willing to forgo higher returns and/or take greater risks to finance the loan. get a loan.
There can be a real sense of community at a P2P lending site. Forums tend to be active, and information is eagerly exchanged about lending and borrowing experiences. The proposed changes in P2P lender policy are strongly debated.
Some people just hate banks and will do anything to avoid using them.
Of course, there is a downside:
Many borrowers are disqualified because they do not have good credit.
Lenders face exposure from default and their funds are (with some exceptions) uninsured. The success of a P2P lender to limit loan losses varies from lender to lender and over time. A lender can be told of taking on a bad debt with a good sob story.
Compared to going into a bank or credit union, P2P lending can take more work, especially if the loans are funded through an auction. The loan selection and bidding process can require a level of financial sophistication that many people don’t have.
While returns for lenders may be higher than for certificates of deposit, it is unlikely that they will be higher over time than those in publicly traded index funds, which require relatively little work. jobs to buy and keep.
Not everyone wants their financial stories published on the internet; For those with a sense of personal privacy, great personal banking has its benefits.
Because this is such a new industry, there are bound to be waves of lender consolidation, interface/administrative changes, and changes to the lending practices themselves. This can be more of a burden and risk than disciplined investors are willing to allow.
Despite the limitations, P2P lending is gaining traction and seems certain to become more popular. There are P2P lenders in a number of countries, including Italy, the Netherlands, China, and Japan, with startup operations in many other countries. Bitcoin and stablecoins are also a remarkable form of cross-border peer-to-peer lending that can disrupt any traditional form of peer-to-peer borrowing.
See also : Why does the value of Bitcoin fluctuate so much?
According to Tapchibitcoin.vn
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