What is Peer to Peer lending?

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What is Peer to Peer lending?

If you have been hearing about “Peer to peer lending” but have not much idea, what it is all about.. Here are some inputs regarding what it is..

“Peer to peer lending” brings together the people who want to invest with people who want to borrow. It’s a good model that allows the borrowers and lenders to enable the flow of funds directly between them without involving the intermediary (such as a bank).

So how it such a model good for borrowers as well as lenders.

“It cuts the cost and complexities of traditional bank loans and passes the savings to the borrowers, and better lending rates to lenders”

Suppose you were taking a bank loan at 15%, and lender was getting just 5% for his money deposited in bank, so now lender can get 10% on his money and borrower can get money at a cheaper rate (10%) which means its a win win situation for both lender and borrower.

Nevertheless, there is a caveat! How will the credit rating of those who want to borrow money be verified. This will work in the same way as a bank verifies the credit history of the borrower. But the difference is that in traditional banking, the risk lies with bank if the borrower defaults.

Whereas in the peer to peer lending, the risk will lie (more or less) with the lender himself !!

 

Here is an interesting video explaining how peer-to-peer lending works?

If you would like to learn more about peer to peer lending, there are some platforms which are already doing this such as “Prosper.com” or “LendingClub.com” in US, “Zopa.com” (which is  UK’s biggest peer-to-peer lender), “FundingCircle” and “Ratesetter” in UK, or “Harmoney.com” in New Zealand.

In India also, some of the platforms such as “Faircent” and “i-Lend” are trying this model.

As of now, we believe that P2P lenders face several challenges because of legal questions, such as from where the money is coming in- who are the borrowers? who are the lenders and for what purpose they might be using the money? Will they be able to return the money? And hence, we believe that this sector will take a little time to attain traction.