Social trends have transformed the modern workplace and how we manage our finances these days. Many technological innovations have sought to integrate modern mechanisms into the way we lend and carry out transactions.
Various technological changes along with several international changes and globalization trend have reduced the use of the middleman in many industries. Thus, we have entered the era of ‘technological disintermediation’.
Smart devices, faster connectivity and cloud networks make it easier for groups to interact through mass collaboration. They can work together online without wasting time and energy in going to a particular place to get some work done. Social networking sites such as Facebook and LinkedIn and online stores such eBay, Craigslist and Amazon are a classic example of how internet has removed the need of intermediaries. In fact, microlending has also played a major role in introducing the concept of lending smaller amount of loans to individuals who cannot afford to pay a lot in bulk.
What’s the concept of Peer-to-Peer lending in Economics terms?
P2P lending is short for peer-to-peer lending, where you can borrow or lend money to another individual without having to deal with the intermediaries such as credit unions and banks. It also termed as social lending.
P2P lending is equally popular among the lenders and the borrowers since it curtails interest rates for the borrowers along with increasing the returns for the individuals responsible for supplying the capital. On the downside, this method of lending requires greater amount of time and effort. Moreover, the risk involved in P2P lending is also greater than in other forms of lending.
Individuals supporting the idea of social activism and personal freedom when it comes to working are better known as freeformers. Instead of working for a single company for several years, they believe in working on several projects by collaborating in networks. They do not favour the large corporations such as banks and prefer to work alone rather than reporting to an authority. P2P lending, therefore, is a great option for them.
P2P— the Social Lending: How Does it Actually Work?
P2P lending works in a rather simple manner. First of all, anyone who is interested in being a part of P2P lending signs up and joins the P2P lending website. This website belongs to a company that makes its profits through a minor fee charged by both parties involved. It serves them by making the transaction easy and keeping a record of fund transfers.
Borrow via Peer-to-Peer – Specifications and Eligibility
Not everyone can borrow money using the P2P option. Before a person is eligible to borrow money, the P2P lender makes a thorough check on their financial status including personal, credits, and employment checks. Since P2P lending involves greater risk, the rules are also extremely strict. For example, people with bad credit cannot avail this option.
Once the lender is satisfied, the person becomes eligible to borrow money. Now they can opt for one of the following two scenarios:
In first case, the lender will give the borrower four or five categories. These are risk categories and you are allowed to borrow on the current rate for your risk category for that specific day.
In the second scenario, the borrower’s loan will be auctioned to people who have funds they want to lend. Only the lender or the bidder has access to information they have provided such as their financial status, their specific need for which they are asking for the money, and their personal information. Either their loan is then bid with them providing an interest rate, or if the entire loan is funded, the lenders bid according to the interest rate they offer.
P2P Cost Benefit Analysis
Cost Analysis of Peer-to-Peer Borrowing
A P2P lender can be made to believe into lending money because the other person has a solid reasoning but it can actually also be a hoax or a fake story to manipulate the lender. This is a relative risk which is substantial one.
If the P2P loans are funded through the auction process, getting a loan often becomes quite a lengthy process. In some cases, it is easier to just walk to a bank and get a loan.
It is not easy to have your borrowing application accepted at a P2P company if you have a bad credit history since their rules are rather stringent.
Now let’s dive in to take a look at the advantages associated with the mechanism.
Benefits of Peer-to-Peer Borrowing
There are many people who feel nervous about using a bank for any set of personal reasons. P2P lending is a great option for such individuals.
Both lenders and borrowers enjoy cost advantages if they use a P2P company instead of using a bank. For example, the lenders will have a higher percentage of returns while the borrowers will spend less.
Most people are interested in knowing about the other party and P2P lending offers this option. Once a lender knows whom they are lending to and why the other person needs the money, they feel more satisfied. Similarly, it is easier for them to trust the other party if they know the reason of borrowing as well.
Another great advantage of P2P lending is that it opens up chances of charity. For example if a borrower has a bad credit history but their reason for asking for the money is genuine, the lender might ask for lesser return and thus offer lower interest rate.
P2P lenders can make use of the P2P Company in two ways. Besides going for bidding on loans, they can spread funds among between different borrowers. The lenders have the freedom to choose any risk category. If they choose a higher risk category, their return will also be greater. However, in this case, the risk factor will also be greater, and so will be the chances of default.
If you are looking for a P2P lending option, use Quiddi Compare to browse through the various P2P companies offering the services.