What is Peer to Peer Lending?

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By Crispin Bateman
Updated on Tuesday 22 October 2019

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Better than Savings for Some, Better Borrowing for Others


With a growth in crowdfunding ideas over the last couple of decades, peer-to-peer lending represents the honest core of internet money-sharing – cash in, and cash out in a way that seems so obvious it’s a wonder it hasn’t been around longer.

What is Peer to Peer Lending?

Sometimes abbreviated as P2P, peer-to-peer is a way of saying person-to-person. With regards to lending, P2P lending is simply people lending money to each other, with the internet used as a way to reach a greater audience. Of course, all this money changing hands requires a substantial amount of administration and infrastructure to properly work, and that’s where the P2P lending websites come in – a structured and regulated system to facilitate the idea.

Those wishing to invest into the system and lend come to the P2P site and deposit their funds into the pool, while those needing to borrow can request money from the pool in a way similar to a standard bank personal loan.

P2P Lending for Investors

While it can be seen as an excellent thing to do with your savings – P2P lending offers interest rates considerably greater than traditional saving routes – it should be seen as an investment rather than a savings system as, despite the strong security and regulations, there’s no savings safety guarantee.

Depending on the site chosen, you can specify the level of risk you are willing to undertake and, as seems obvious, the greater risk options can yield the greater rewards. The P2P system uses your money and matches it with borrowers that fit the profile you choose.

Of course, if there is a problem regarding the money being repaid, the onus is entirely with the website – they do all the administration including any chasing for payments that has to be made. There’s never direct contact between you as a lender and the borrower.

P2P lending is definitely a great opportunity for anyone with some spare funds who is willing to tie them up (often the money must be held by the P2P site for years – there’s no easy-access here), and take a little extra risk.

Like any new venture, it is advisable to tread carefully until you are comfortable with the system. Invest what you can afford to, learn the different websites and find the one that best suits your personal needs.

P2P Lending for Borrowers

For those on the other side of the market, P2P lending can offer better rates and may offer funds to those with a weaker credit rating. While they are not as willing to lend on bad credit as many payday loan companies, P2P sites can be more forgiving than the high street banks and credit card companies.

Once the loan application is made, the system works a lot like the online banking systems – you wait for an approval and once it is made receive the amount which you must repay with interest every month.

To the borrower, there’s enough similarity between a P2P loan and a regular unsecured bank loan as to make the difference near indistinguishable.

It’s certainly worth trying out if you are wanting a mid-range loan, perhaps for debt consolidation or an exciting holiday away. The rates won’t scare you off and the opportunity is there for a lower overall payback cost.

The Future

While still relatively new, P2P lending is another example of the internet changing the way we do business together for the better, cutting out the middleman of the banks and giving both lenders and borrowers more control over their money.

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