What is it?
With the introduction of so many types of loans that a person can take out, the emergence of peer to peer lending is not a surprise. When borrowers realized that they can eliminate the middleman and start to borrow from people who are willing to lend them without any policies that can shoot them down, that became the start of a great lending and borrowing service.
Think of it as eBay providing you a portal where you can contact the seller themselves and purchase the product without having to pay any extra prices to avail the product. Peer to peer lending works in the same way.
This was a way to bypass the extra costs and fees that banks charged from both lenders and borrowers. The lender can set their own interest rates to get full interest from the borrower, and the borrower does not have to pay extra bank processing fees on their loans.
Acquiring a Peer to peer loan
Acquiring a peer to peer loan is the easiest process. There are many sites that are forums for both lenders and borrowers to meet each other and discuss the terms of lending and borrowing. The sites regulate how lenders and borrowers can meet each other and even perform credit check son borrowers so the lenders can give their money with minimum risks.
Talking about risk, since this is not a government run lending facility, or does not fall under any laws on long term or short term lending, the guarantee of return of any default is not covered. This means that the lender is putting their money at a huge risk with the hopes of a full return with interest. This is why credit checks are extremely important to not let the situation get there.
The government run Financial Services Compensation Scheme(FSCS) does not cover online peer to peer lenders in their £75,000 safety for lenders.
Most of the times, the situation does not get to that because the lender is able to take legal action against a person who does not pay abck the acquired loan as this comes under theft and financial fraud. Go to sites like QuiddiCompare to seek out lenders and borrowers with a thorough background and credit check.
On P2P lending websites, borrowers are assigned a category from one to four or five categories (depending on the site). These categories state the risk factor that a lender has when giving you the money. This category is very important as the lower your category, the less likely a lender will give you money. After taking the loan, you must pay back the loan by the decided dates in full and with interest so that the lender does not rate you down.
People who come to these sites with a low credit score tend to not get a loan due to the high risk factor for the lender, however if a person sees the potential in you and you fail to pay the loan back with a low risk factor, it might become impossible for you to take out a loan again.
After that the loan price that you have set is sent for an auction to lenders. They can access the information about you, your employment, income, credit history, along with other information that you may have provided. The personal information you provide can be anything from the reason why you want to take out a loan to things that prove that you are going to do something productive with it such as a photographs or even a personal account of some event.
Lenders don’t have categories, but they can choose from categories. Lenders can join P2P sites and auction for loans, or they can ask the P2P site to distribute their loans equally among borrowers of their desired category. The way it works is that the higher risk you have in your loan portfolio, the bigger your returns. This means more profit but a higher chance of default.
Summarising Pros and Cons
- Lenders can expect bigger returns on their investments as this means they do not have to go through bank fees or third parties for returns.
- When you personally know the borrower, you can expect them to return the money as it will cause them trouble borrowing in the future plus there is a sense of self satisfaction in knowing you helped out a person. There is also always the option of asking the person you lent the money to help you in your time of need.
- It can be your charity. If you see a person with bad credit history, but has a solid story as to why they need the money, you can take a risk and lend them the money. The person would be forever thankful to you.
- You can learn a lot about how people are investing these days and what kind of a market you need to invest in.
- A lot of borrowers are left out because of their bad credit history.
- Lenders can be hustled for their money if the person has a good enough story to convince them of the dire need of funds.
- Auctions require a lot of effort on your part as compared to walking in to a bank and acquiring the loan.
- No privacy. Banks and official lenders keep your personal information to themselves but on these sites anyone can access it and know everything about your current financial situation.
Considering these things, you might want to carefully consider whether you would opt for a Peer to Peer loan or not. There are advantages of it. These loans produce the best returns but that is if they do produce returns. Visit https://quiddicompare.co.uk for more information on peer to peer loans and be safe while lending.