Technology brings old world lending practices to an entirely new level with the availability of peer-to-peer lending. For centuries, there has been lending outside of the traditional western-style formalized lending system, made up of banks and other professional lenders. Groups of people, such as immigrant populations, ethnic communities and trade groups, have long operated their own networks of lending amongst members. Peer-to-peer lending uses today’s technologies to bring a similar lending philosophy to a wider group of people via the Internet.
How Peer Lending Works
Peer lending, also known as person-to-person lending, is fairly simple, although the details may vary slightly between the different providers offering this service. A potential borrower prepares a statement as to what he needs and why. His credit history, income, and other relevant information, are submitted to the facilitating entity, the provider that acts as the go-between for the borrowers and lenders and processes the financial transactions. There is a verification process to establish the validity of the information.
The loan request is posted on the site, along with the data necessary for lenders to make a decision. The publicly posted information does not include private or personally identifying information. In other words, a borrower will not be making information public that will run the risk of identity theft or having numerous spammers or telemarketers engaged in ruthless pursuit.
Potential lenders browse through loan requests and choose to make loans or not. There is a bidding process, in which lenders offer to make the loan at a specific rate of interest. A single lender does not have to make the entire loan. Often a lender will supply a part of the requested loan, with the entire loan amount being split up between several lenders.
These are typically shorter-term loans, with some providers setting a limit of three years for repayment, and for smaller amounts. People choose to take out such loans for a broad range of purposes, including debt consolidation and business start-ups.
The provider earns a fee for processing transactions and the other tasks involved in making the system work, the lenders earn interest on the money they lend, and the borrower obtains the loan that he may not be able to get through other channels. Interest rates may run a bit higher than traditional lending for some borrowers, but are often much lower than traditional bad credit loans.
Placing Borrowing And Lending Back In The Hands Of The People
All too often, traditional lenders are absolutely impersonal, running strictly on the numbers. Peer-to-peer lending allows a borrower to present a request that is more personal, and lenders can make their decisions by factoring in the details that make that borrower an individual, such as a specific set of circumstances that may or may not fit neatly into traditional lending boxes.
That lenders have the ability to spread the risk can mean that they are willing to take a chance on a loan that other lenders may not. Furthermore, traditional lenders often don’t deal in the smaller amounts that a borrower may need, or at least not under terms and conditions that work for some borrowers. Peer-to-peer lending is a great opportunity to move beyond the limitations of standard options available today, and holds significant appeal to those interested in ways of doing business that do not rely on big business financial institutions.
Peer-to-peer lending seems to be a growing phenomenon, and with good reason. Based on traditions of lending outside of established banking systems that have been in operation for hundreds of years, peer-to-peer online lending blends the best of old world money lending practices with the technology of today to create loan opportunities that are much more in the control of the individual, and that is always a good thing.
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