Peer-to-Peer (P2P) Lending Definition
Peer-to-Peer Lending (P2P Lending) is a technology-enabled practice where individual lenders and borrowers are connected through a digital platform for lending purposes, allowing individuals to get loans directly from other individuals without an intermediary, such as a bank or a financial institution.
Peer-to-Peer (P2P) Lending Key Points
- P2P Lending connects individual lenders and borrowers directly.
- It effectively eliminates the necessity for traditional financial intermediaries.
- It’s a form of crowdfunding, where the lenders are typically everyday investors.
- P2P Lending platforms use technology to assess risk and creditworthiness.
- It can often provide higher returns to lenders and lower rates to borrowers.
What is Peer-to-Peer (P2P) Lending?
P2P Lending involves a direct agreement between lenders and borrowers. This form of lending takes place online on peer-to-peer lending companies’ websites using various lending platforms and credit checking tools. It is a modern solution to an age-old practice, made possible through technological advancements, that cuts out the ‘middle-man’ from the process.
Who uses Peer-to-Peer (P2P) Lending?
The participants in P2P lending are individual borrowers and investors. The borrowers are usually individuals or small businesses looking to secure loans at a reasonable interest rate. On the other side of the transaction, lenders — generally individual investors — seek to diversify their investment portfolio and earn comparatively higher returns on their investments.
Where is Peer-to-Peer (P2P) Lending used?
P2P Lending is primarily an online activity conducted on dedicated platforms or websites. These platforms operate globally and have brought a global perspective to lending. They serve to connect investors and borrowers from different regions, offering a platform for cross-border transactions to take place.
Why is Peer-to-Peer (P2P) Lending popular?
P2P Lending is gaining popularity due to its convenience, speed and transparency. It offers heightened control to lenders and borrowers who can negotiate directly, decide on suitable interest rates, select investment or borrowing amounts and potentially earn or save more when compared to traditional bank loans. It also offers an alternative for those who are unbanked or underbanked.
How does Peer-to-Peer (P2P) Lending work?
The operation of a P2P lending platform is fairly straightforward. Borrowers complete an online application, and their credit risk is assessed through the platform’s proprietary algorithms. Depending on the risk assessment, a suitable interest rate is suggested. Multiple investors can then fund these loans in a fraction or as a whole. Upon a completed transaction, the borrower makes periodic repayments of principal amount and interest, which is then directed back to the respective investors’ accounts.