Peer-to-peer lending is one of the safest lending options in the market. Actually, it is not even in the market. The option is available somewhere in your contact list or even inside your home. Peer-to-peer lending is a popular option in the UK and across the world. Also known as social lending, the borrower lends money directly from a closed one on low interest. The government or private lending institutions are not involved in peer-to-peer lending. The interest rate in peer-to-peer lending is often low as compared to other types of loans. P2P lending is usually unofficial but both the parties may produce and sign a legal document to secure money. However, peer-to-peer lending has some drawbacks as well.
The Concept of Peer-to-Peer Lending
Peer-to-peer lending emerged as a friendly loan process. In peer-to-peer lending, the borrower and lender agree upon a specific interest rate as well as duration of loan return. There is no intermediary involved in P2P lending. The process is usually similar to other types of loans, except that the borrower does not pay commercial fees and hidden charges. The interest is also lower.
The Benefits of P2P Lending for Lender
Why people lend money to their loved ones, you ask? Well, a borrower takes money to fulfil their financial need along with enjoying the benefit of paying low interest. The lenders, in contrast, enjoy the benefits of lending money on low interest. They can invest this money in their desired markets later on. The lenders earn money using P2P lending techniques. Many times, those lenders agree to lend money who cannot enjoy the benefits of commercial or registered lending.
The lender could be anyone. Many times, people lend money at the times of need in return of some favour. For example, a businessman lends money to the partner in return of a business deal. Such kinds of P2P lending deals have a business nature and require critical calculations. The businessman may lend money as a friendly favour. However, this kind of favour is different from angel investment in a way that the borrower returns money after establishing their business or earning their goals in angel investment.
The Benefits of P2P Lending for Borrower
Apparently, the borrowers enjoy more benefits in P2Plending than the lenders. The borrowers can not only obtain the loan amount at lower interest but they can also request for an extension in the loan repayment. Furthermore, as this is not an official agreement, both parties can sign the deal according their own conditions. The most important benefit is that the borrower can convince the lender for accepting a few terms, which may bring some drawbacks for the lender.
The chances of default are low in P2P Lending as the borrowers can obtain money on low interest. They can pay the principal first and interest as a second priority. In long-term P2P loans, the interest gradually decreases, hence leading to less than 1% interest at several stages.
The Drawbacks of P2P Lending for Lender
Most of the people choose P2P lending when they are doubtful about their capacity to repay the loan amount. This is why, when a lender lends money to a borrower through P2P lending technique, they cannot be sure about the repayment of loans. The borrower may use different techniques, sometimes blackmailing techniques, to extend the loan repayment tenure. The borrower may also convince the lender on unrealistic terms.
The lender may also be forced to accept a few conditions on certain terms. Therefore, you should always sign the document after carefully evaluating your relationship with the borrower.
The Drawbacks of P2P Lending for Borrower
The borrower should also re-think a hundred times before lending money from someone. Remember that if you fail to repay the loan amount, you may lose a relationship. Furthermore, if you have signed a legal document, the lender may take you to the court. The borrower may win the financial deal but the borrower may also lose a relationship.
Fees and Charges Involved in Peer-to-Peer Lending
Different types of fees and charges are involved in peer-to-peer lending, especially when you sign a legal contract. The money is usually transferred through the bank. The most important one is the fee charged on due payments or failed repayments. This is called Unsuccessful Payment Fee. The fee may differ from lender to lender but it is £15 usually. The second most important one is the processing fee of legal documentation. It is usually around £7.
Are There Any Penalties?
Aside the unsuccessful payment fee, the lender may take the borrower to the court. The court will evaluate the credit score, loan amount, and delay duration of repayments. The court will then decide the amount of penalties. However, the lender may forgive the repayments but this case is rare.
Can Investors Benefit from P2P Lending?
As mentioned earlier, many people lend money to people as friendly favours. The investors can get their favourite deals by lending money to the borrowers at times of their need. Some investors do not register as commercial lenders. They can work as private lenders to lend money on their favourite terms and get high returns by evaluating the credit report of the borrowers. This way, they can get high collective profits. The commercial lenders can also add P2P lending to their portfolio to add diversification.
If you are interested in getting further information about Peer-to-Peer Lending or comparing the rates of commercial lenders then visit Quiddi Compare. Here, you can also get extensive details about credit cards, bank accounts, long-term loans, short-term loans, payday loans, and more.