What is Peer to Peer Lending?

Peer to peer lending is just what it sounds like - the opportunity to borrow money from a private individual, not from a financial institution. There are advantages and disadvantages to both the borrower and lender through this type of transaction, but for certain instances, a peer to peer lending situation works out for everyone.

Peer to peer lending has exploded in popularity in recent years. As the credit markets have tightened and interest rates have continued to drop, peer to peer lending has opened doors for both lenders and borrowers that might not have been there otherwise. Marketplace peer to peer lending brings together strangers with similar goals - to borrow or lend at better rates and under better conditions than traditional institutions offer.

The advantages of peer to peer lending are numerous. For the lender, it is an opportunity to put their money into an investment scenario that offers a higher interest rate than traditional investments, such as CDs or a saving account. It allows lenders access to the consumer credit market and many of the facilitator companies actually provide insurance against defaults.

The advantages to the borrower is that they can appeal to lenders on a personal level and perhaps get loans that they would not qualify for at a traditional financial institution. Large institutions rarely factor in the borrower's "story," but a private individual can often be persuaded with compelling background information. Finally, the paperwork is generally simpler to complete and process than at the bank.

The disadvantages of peer to peer lending are tied in to the risk factor. The lender runs the risk of the borrower defaulting on the loan. Also, the lender is locked into the interest rates for the term of the loan. Also, the lender may be dealing with borrowers that have been turned down by traditional institutions - regardless of circumstances.

The borrower takes a risk in that private lenders don't need to conform to federal lending laws. There are also differences in everything from credit bureau reporting policies to how they share your private information, so make sure to research the company/lender thoroughly before going through with a loan. Finally, the interest rate for repayment may be higher than if you went to a bank, although sometimes they are matching or better for unsecured bank loans.

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