Peer to peer lending is also referred to as social lending. It involves the process of borrowing or lending money between two separate individual entities. The process of borrowing and lending money happens by bypassing the intermediary institutions like banks.
It is gradually increasing in popularity, as it is extremely beneficial for both the lenders and the borrowers. It makes sure that the lenders receive a decent amount of return out of it whereas the borrowers can get a cash injection to make their business successful.
The lender can receive better interest rates as compared to the interest rates they might get on the bank saving accounts. Whereas the borrowers can pay less than the money, they have to pay on a bank loan.
To establish an effective peer to peer lending relationship make sure that you determine the amount of capital that lenders are willing to lend and for how long they can lend their money to the borrowers.
The average lending cycle is between 1-5 years. Therefore, the lenders need to make sure that whether they are willing to lend their money for such a long period.
However, many lending companies can allow you to withdraw your loan from a borrower but for that people might have to pay a specific amount of money and they have to wait till any other lender comes and replaces them. It can be a long procedure.
How did the peer-to-peer lending process work?
The peer-to-peer lending process is a two-way relationship between the borrowers and the lenders.
The lenders to lend their money would place the money they want to lend in an account through which the borrower would borrow the money.
The lender would then decide the interest rate on which the money would be lent to the borrowers. The lender should come up with ways through which they can assure that they would receive their money back as peer to peer lending bypasses all kinds of intermediary institutions.
There are certain benefits of peer to peer lending that are enjoyed by the lender and the borrower as well. Some of them are mentioned below:
Benefits of using Peer-to-Peer Lending
The main benefit is for the lenders as they are in a way of saving their money. They would receive their money after a certain amount of time has passed but the money would include the interest rates as well thus the lenders can make ample amount of money out of the capital lent to the borrowers.
The lenders are protected by the Financial Regulatory Authority thus ensuring that the money transaction between the lender and the borrower happens in a way that the money lent is secured.
Most of the Peer to peer lending sites knows how to make sure that the borrowers pay the money on time. In case the lenders are unable to retrieve their money from the borrowers they can take help from such websites.
Risks involved in Peer-to-Peer Lending
People might not share the actual information. Thus it might be difficult to trace the actual borrowers. Hence a lot of risks are involved in this method of saving your money with someone you hardly know.
The money lent or borrowed is not protected by any Government mechanism or authority, which means that if there is an error in the transaction, the lenders might lose all their money in one go. They might not be able to retrieve it back.
Peer to peer lending focuses mainly on the long-term investments hence people might not know how the situation will turn out in the future. The situation might have an impact on the money that is lent to the borrower.