The Growth of Peer-to-Peer Lending

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[Photo Credit: Flickr/Simon Cunningham]

One of the benefits of the 2008 financial crisis and the Great Recession that followed is the growth of a form of alternative lending that’s giving consumers another way to obtain the financing they need. The lending freeze that occurred for several years made it more difficult for borrowers to find traditional lenders willing to part with their money. For those fortunate enough to find a financial institution willing to lend, the cost of interest and the terms can add more stress to an already overburdened credit situation.

Peer-to-peer lending has become a way for borrowers to be matched up with investors willing to fund their personal loan requests. Depending on a borrower’s credit it’s often possible to obtain a loan with a much lower interest rate than what could be found at a traditional institution (like a bank). Some peer-to-peer lending platforms use a larger number of factors in order to determine whether or not a borrower is approved and funded, including the FICO® Score and the borrower’s own personal story, which may mean increased success for consumers frustrated in dealing with the strict guidelines of banks.

The way that peer-to-peer lending works is that a borrower applies online to one of the many peer-to-peer platforms. The application is a simple listing that states the loan amount and the reason for the loan along with the information needed to assess credit risk. The peer-to-peer lending platform works to match potential investors with personal loan listings; the investor can then decide on which loans they want to fund, and for how much. Individual investors can decide whether to fund some or all of the requested loan amount, meaning a borrower can be fully funded from several sources without having to do the work of finding the lenders. So, instead of a consumer relying on just one institution or shopping from one bank to the next to try to get the money needed, using a peer-to-peer lending platform gives many people a better chance of getting their personal loan in one place through a number of investors.

When investors have agreed to fund the whole loan amount, there money is collected by the lending platform and electronically deposited with the borrower. The borrower only makes a single payment to the peer to peer lender, who in turn disburses the funds each month to all investors in the loan. This serves to protect the identities and privacy of both the borrowers and the investors.

The interest rates that borrowers can find using a peer-to-peer lending platform are typically lower than what someone could get from a credit card company, making this form of personal loan a more affordable option. Also, most peer-to-peer loans are unsecured loans, meaning that borrowers can take advantage of a lower interest rate without the risk of putting up property as collateral.

Being a personal loan, many peer-to-peer platforms and investors offer funding for a wide variety of uses including debt consolidation, home improvements, auto loans, medical and/or dental expenses, as well as life events like engagements, weddings, and child-related costs.

Peer-to-peer loan borrowers benefit from lower interest rates and fees because the peer-to-peer platform providers don’t have the same costs and overhead as traditional banks with many different local branches. The application process is simplified, making applying for a peer-to-peer loan less confusing than dealing with the paperwork that comes with a bank loan. These cost savings and the application and review process are also attractive to investors, helping peer-to-peer lending grow in popularity. Also, the privacy of both the borrower and the investor, as well as the peer-to-peer loan industry being overseen by the Securities and Exchange Commission (SEC) has helped with the increasing popularity.

For borrowers who are struggling to find a lender willing to give them a loan, or are tired of going through the paperwork that financial institutions require, peer-to-peer lending can be an alternative way for consumers to obtain the money that they need at an affordable and fixed interest rate, favorable terms, and fixed monthly payments.

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