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Risks and benefits of peer-to-peer lending

Risks and benefits of peer-to-peer lending image

Are you looking for a personal loan? Twenty years ago, your choices would have been either to apply formally for a loan to a bank or any other financial lending institution or probably asking some of your friends or family members to finance you for a couple of months. However, that's no longer the case anymore, as now you have a choice between those two extreme choices, it is called peer-to-peer lending.

What is Peer-to-Peer Lending?

Peer-to-peer lending aka P2P is a new way of lending money directly to the individuals or businesses without any intervention of an official financial lending institution. P2P lending is usually done through various online platforms that match potential borrowers with the lenders and after that, the money is transferred through a secure process.Most of the loans given through P2P lending are unsecured loans even though they also offer secure loans to the borrowers.

Secure loans are generally backed by luxury items and are very rare in the industry. P2P lending features some unique characteristics and because of that, they have quickly become one of the major alternative lending sources.

Risks and Benefits of Peer-to-Peer Lending

Benefits of Peer-to-Peer Lending

1. Faster Loan ApprovalSince everything happens digitally in P2P lending, it takes less time and you get your loan approved within minutes or hours in some cases. You also won't have to deal with heavy documentation process like banks as you will require fewer documents and everything happens fast in P2P lending.

2. Reduced Interest RatesThe interest rates on personal loans in most banks are rather high as they are unsecured loans. However, that's not the case with P2P lending. Here, the interest rate very competitive since more than one lenders bid to secure your loan making it possible to secure the loan at a reduces interest rate.

3. No Impact on Your Credit ScoreGetting a personal loan from an online P2P lending site won't impact your credit score. When you enquire about getting a personal loan, mot eminent P2P lending sites only complete a soft search on your credit details. This means you will get your desired information without affecting your credit score for future financial purposes.

Risks of Peer-to-Peer Lending

1. Need to Pass Credit Checks to Secure the LoanMost reputable P2P platforms have their underwriting process and you have to clear them before you secure the loan. These are checks performed on your credit score as well as various other internal checks to make sure you are worthy of securing the credit. This is mainly done to protect the funds of the investors as well as to identify the likely future defaulters.

2. You Might Have to Pay an Application FeeMost reputable P2P lending platforms make money by arranging the loan between the borrower and the lender and hence, charge an arrangement fee every loan they match. This fee might be utilized on various security measures to protect the funds of the investors in case of defaulting loans. However, these fees are usually added on to the cost of your loan and you won't require to pay anything upfront.

Conclusion

P2P lending is fast gaining traction among people who don't the hassle of the traditional banking loan system. It is one of the most radical and disruptive innovations in the finance industry of our times. It offers many people who are left behind a chance to financially inclusive. P2P lending is poised to become one of the most profitable investment options in future thanks to its promise of decent returns, simplified asset class, favorable regulatory framework, greater transparency, and many other useful features.

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