What is Peer-to-peer lending?
Sometimes abbreviated to P2P, Peer-to-peer lending is a way of debt financing that allows people to borrow and lend money without employing an official financial institution as an in-between. It is also commonly known as “social lending”.
Best known as crowd lending, numerous peer-to-peer loans are indiscreet personal loans, nevertheless some of the prime amounts are borrowed to businesses. Safeguarded loans are occasionally obtainable by using luxury assets such as jewellery, watches, vintage cars, fine art, buildings, aircraft and other business assets as warranty. They are made to an individual, company or charity. Other types of peer-to-peer lending comprise student loans, commercial and real estate loans, payday loans, as well as protected business loans, rental, and factoring.
In P2P lending, lenders set interest rates and compete for the lowest rate on the reverse auction model or fixed by the intermediary company on the basis of an analysis of the borrower’s credit. The lender’s investment in the loan is not usually protected by any government guarantee. On some services, lenders alleviate the risk of bad debt by selecting which borrowers to lend to, and lessen entire risk by varying their investments among different borrowers. Other models encompass the P2P lending company keeping a separate, ring-fenced fund.
Characteristic of peer-to-peer lending include:
- it is occasionally done for profit;
- no necessary common bond or prior relationship between lenders and borrowers;
- intermediation by a peer-to-peer lending company;
- transactions take place online;
- lenders may often choose which borrowers to invest in, if the P2P platform offers that facility