Peer-to-peer (P2P) lending grew out of the 2007 global financial crisis, when traditional loans became difficult to get. So what are they, and how do you get one?
What is peer-to-peer lending?
With peer-to-peer lending you quite simply borrow from strangers. An online platform matches you up with people willing to lend. This is also called debt crowdfunding, crowdlending or marketplace lending.
At first, these platforms mainly provided personal loans, but this has expanded to business lending (sometimes called peer-to-business or P2B). Some major platforms have even developed partnerships with banks.
How does peer-to-peer lending work?
You complete an online application on the peer-to-peer lending platform website. Say why you need the loan, how much you need, and your preferred length of repayment.
The platform checks your application and determines your risk rating based on factors such as your creditworthiness, security and revenue projections. The platform sets the interest rates. (The interest rates can also be set by the lenders bidding for the lowest rate through a reverse auction.)
If approved, your loan request is loaded to the platform for interested lenders to browse and decide how much they want to lend to you based on your risk rating and the interest rates.
If a rate looks good, you accept offers from one or more lenders. Or, if no one is interested, the platform removes your listing.
- The platform acts as the middleman for transferring the funds and co-ordinating repayments and any security.
Why people choose P2P lending
As the service is offered online, these lending platforms operate more cheaply than traditional banks. This allows them to offer competitive interest rates.
Lenders are attracted by the ability to earn higher returns than they’d get with bank savings or term deposit accounts. And they can protect themselves by spreading their lending across multiple borrowers.
Borrowers are attracted by greater accessibility, faster application processes, and competitive interest rates. Peer-to-business lending platforms may be a better bet for newer businesses who don’t have a credit or cash flow history, those with low credit ratings, and unusual or innovative loan requests.
The lending platform makes its money through fees paid by both parties.