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When looking for a loan, there are many avenues that people may take. In the past, when someone was looking to borrow money, they would have to go through a financial institution to make the deal. Now, peer-to-peer lending has opened up new avenues for lending. No longer does a borrower need a middle man to facilitate loans. They can go straight to the lenders, which can have benefits for the borrower. The aspects of the peer-to-peer lending industry deserve attention, so that borrowers can use the system to its maximum potential.
First, it is important to understand exactly what peer-to-peer lending is. As stated above, peer-to-peer lending allows a borrower to bypass the financial institution middle men and go straight to the lenders to borrow money. These transactions happen online. The money borrowed from these lenders tend to come in the form of an unsecured loan, meaning the borrower does not have to put up anything for collateral. While this may be beneficial for the borrower in the initial proceedings of the borrowing process, they should be aware that these loans can come with high interest rates. Since peer to peer lending is a for profit industry, it is in the best interests of the borrower that they pay off their debt as quickly as possible, so they can avoid costs accrued from interest.
Peer to peer lending has proven to be a legitimate way for start-ups to gain funding. Since peer-to-peer lending happens online, the new business is able to procure funding without ever having to step foot in a bank. This is because the lending process behind peer-to-peer lending is a bit different from traditional loans. In the United States, the companies that engage in peer-to-peer lending must register as securities with the Securities and Exchange Commission. This allows them to view information on the loans without knowing who the prospective borrowers are, allowing the companies to make educated decisions before supplying the funds. It also allows the borrowers to see which companies may offer them the best rates without knowing who the previous loans were for.
There are other benefits to peer-to-peer lending. The long time between application and receiving funds that happens when going through a bank is gone. Instead of months, it can take just weeks. The interest rates can also be attractive. Though, as stated above, they can be high, the interest rates given on peer-to-peer transactions are based on a person’s credit. So, the better a person’s credit, the better interest rate they will get on their loan. And if a person has bad credit, all is not lost. A lender in a peer to peer transaction may be more willing to listen to a person’s details about why they have bad credit, than a bank which may just dismiss them outright.
As with any financial matter, much thought and consideration must be made before a final decision is reached. Peer to peer lending may be the answer for those looking for quick funding without the hassle of dealing with financial institutions as middle men.
By Bryan Levy