What is peer to peer lending?
Peer to peer lending (P2P lending), also known as social lending, is the name given to a loan transaction where there is no bank or financial institution involved. Instead, the lender is an investor looking to make a return on their investment (the loan) and the borrower is borrowing money from the investor directly. These peer-to-peer loans are facilitated by technology platforms that connect the lender with the borrower so that they can transact anonymously.
You could get a personal loan via P2P to fund a business, a holiday, a new car, medical bills, for debt consolidation or a myriad of other reasons. This modern approach to lending and borrowing money has a number of benefits associated with it. By eliminating many of the costs of traditional banking it is possible to offer more attractive interest rates to borrowers while at the same time offering better returns to investors than traditional investment options. From an investor’s point of view, this is obviously a more high risk investment than say placing your funds in a savings account at a high street bank, but the peer to peer lending platforms reduce the risk by carrying out credit checks and vetting the quality of the loan projects on behalf of the lenders. It is also typically the case that multiple investors fund one loan, so as an investor you don’t risk having all your eggs in one basket so to speak.
If you want to borrow money through a P2P lending platform you need to provide some basic information such as how much money you need and how you plan to use it. You will then receive a loan offer. If you are happy with the offer you can formally apply for the loan at which point you need to supply some additional documentation. You’re typically asked to provide bank statements and pay slips for the last 3 months as well as a copy of your ID and a utility bill as proof of residency. Once you have agreed to the conditions of the loans and formally applied, it is then advertised to investors on the platform so they can decide whether they want to invest in your loan project (i.e. whether they want to lend you money). Once your loan is funded you receive notification and you electronically sign the loan agreement whereafter the funds are transferred to your account, usually within a few days.
The process is designed to be easy and pain free for all parties. The great thing about peer to peer lending is that investors have an opportunity to help real people by investing to fund projects that can transform their lives. There are numerous success stories such as small businesses that flourished as a result of a loan that helped them get started where a big bank wouldn’t lend, etc. At the same time it’s important to remember that with any loan you take you need to repay the money at some point, with interest, so you need to be careful not to borrow what you can’t repay.