What is Peer-to-Peer Lending?
Peer-to-peer lending, also referred to as P2P social lending, combines small sums of money from several lenders to offer an unsecured loan to the borrower. When you use P2P lending, rates are generally less than at banks because there’s no intermediary. The loan amounts vary from $1,000 to $40,000.
P2P lenders could include:
- Wealth advisors
- Fixed-income funds
- Alternative asset managers
They see these types of loans as an investment that pays an interest rate that is fixed. They can offer up to $25 for numerous borrowers, resulting in an array of loans to assist in managing risk.
How does a Peer to Peer Loan work?
The majority of peer-to-peer loans are unsecured personal loans arranged on the internet through lenders that use P2P. These websites:
- Find and verify the creditor’s financial and personal information as well as the borrower’s name.
- Conduct credit scoring and checking
- Pay monthly for processing
- Service credit
Be aware that loans made through peer-to-peer networks do not qualify for FDIC insured, which puts borrower and lender at risk. FDIC stands for federal deposit insurance corporation. It protects a person’s account and the money deposited at specific financial institutions, such as banks. If a bank can be FDIC insured, a person’s bank account is guaranteed by up to $250,000.1 If the bank ceases to be in operation, the client will not lose their funds.
It is a good idea to review the conditions and terms of a peer-to-peer loan. Most of the time, these types of loans do not have prepayment penalties, meaning you can pay the loan in advance. However, there could be origination charges or closing charges that could add to the total price.
What are the P2P Loans used To?
Historically, the majority of peer-to-peer lending sites offer loans to people rather than companies. In recent times, however, this has been changing. As per the Small Business Administration, P2P lending is increasing with platforms for online lending filling a niche market for small-scale business capital.
Businesses use P2P loans for diverse number of reasons. Some of them are:
- Purchase equipment and tools
- Consolidation of debt
- Pay for training expenses for employees
Is Peer-to-Peer Lending Safe?
Since peer-to-peer loans aren’t FDIC insured, it poses risks to the lenders and their borrowers. It is possible that lenders won’t earn as much profit as they’d like, mainly if a borrower cannot repay their loan. Being vigilant and researching peer-to-peer lending platforms and companies will allow you to avoid problems.