Everyone knows and understands the details of the traditional loan products, such as credit card loans and mortgage loans. While these loan products are more common in the financial world, there are other products that are perhaps not as common, but are even more useful in terms of allowing people to get their required finances. In this article, we take a look at guarantor and peer to peer loans.
These loan products allow people to use their social contacts and find financial assistance for their most important needs. Here, we first describe how guarantor loans work and then move on to describe the way peer to peer loans are changing the industry norms.
Financial guarantees are already present in different financial assessments and tools. Guarantor loans however, are quite relevant and have become popular in the last few years. They are unsecured loans, which require the borrower to present a person giving a guarantee of repaying the loan on their behalf if they default on their payments.
Guarantor loans are often considered as an alternative to the more risky payday loans, especially in the small scale financial market of first time borrowers. People who have a poor credit score often find that a guarantor loan is the only choice available to them in terms of obtaining their required finances.
Guarantor loans carry a financial risk for people who decide to provide these guarantees. Most of these guarantors though, do not understand the liability of offering these guarantees such as a drop in their own credit ratings and reliability for future loans.
Demographics of Guarantor Loan Borrowers
Guarantor loans are often the best financial instrument for people who cannot find loans directly through banks and credit cards due to having lower credit scores. According to a study, there are millions of consumers in the UK who cannot receive a traditional loan due to their low credit score. The guarantor loans are available at a lower APR when compared to payday loans, but generally have higher interest rates when compared to the traditional bank loans.
Peer to Peer Loans
Peer to peer loans are often termed as P2P loans and describe the practice of obtaining loans directly from private investors. There are many websites that are offering these services. They match lenders with borrowers and allow private investors to diversify their investment portfolios, as well as help them find their required borrowers.
Peer to peer loans are often termed as crowd lending. There seems to be more risk in such loans, because they are unsecured and there are no government guarantees available with P2P loans. However, as investors can diversify their portfolio and give their wealth to different borrowers, they mitigate their risk and ensure that they make more profit when compared to the one that they would make by keeping their money in a traditional savings account.
Most peer to peer loans are awarded to start-up companies or individuals who represent a unique business idea. The loans are usually awarded by using the reverse auction model, where lenders compete to offer the best rate to a borrower, who posts the details of a required loan. Another model used in P2P lending is the fixed loans that are usually given by looking at the previous performance of a borrower, which may include looking at the current credit score.
There are also several risks that are involved with P2P lending, such as the bankruptcy of the companies or individuals taking the loans. Smart P2P investors though, distribute their funds among borrowers that belong to the different industries and working with different business models. This reduces their risk, but they often enter the P2P market, because the interest rates of these loans are much better than what are offered by the traditional banks and investment funds.
Demographics of P2P Loan Borrowers
Most P2P loan borrowers are young people who are looking for the required finances to start up their entrepreneurial businesses. P2P loans can also be used for other purposes, as long as borrowers can appeal to the private investors that they will be able to return the loan within the designated time period.
Most P2P loan borrowers are also people, who generally do not have enough resources or previous credit history to obtain the amount of money that they need for their financial schemes. The reverse bidding model helps them find the best financial partners and there have been many successful businesses that have started with the support of P2P loans.
The Best Alternative
The best alternative loan option between the two depends on the particular circumstances of a borrower. If you have a relative or a close friend, who is in an excellent financial condition, then a guarantor loan works perfectly for you. You have to ensure as a borrower though, that a guarantor fully understands the financial risks involved with such loans and willingly takes part in signing the dotted line in your loan application.
The second option is that of P2P loans. The peer to peer loans are perfect for you if you are an entrepreneur and looking to find strong financial support in order to put your business idea into motion. It is also a good option for people, who unfortunately suffer from a poor credit history and now find that they cannot obtain a loan from the traditional banks. P2P loans are also perfect for people, who like to perform most of their financial activities online as they are usually available over various Crowdfunding websites.
If you are in a dilemma as to what type of an alternative loan will work best for you, then you can always visit QuiddiCompare and find more information on guarantor and P2P loans. This will help you decide easily, and also ensure that you are able to learn about the various resources that you can use, in order to get these non-traditional loan instruments for your particular needs.