There are so many risk and rewards that is involved in Peer-to-Peer lending and understanding them will help an investor to make informed decision.
Peer-to-Peer lending simply means lending money directly to another person with no official process like going to the bank or any financial institution and providing collateral and most people choose this form of lending.
Some have a negative view about P2P lending because of their negative past experience, P2P lending can also be called crowd or social lending.
Individuals run P2P lending, also there are official websites that help borrowers to connect directly with investors, some of these lending platform are prosper marketplace, peer form upstart, funding circle, lenders market and lending home, all these website are available for sign up and get a lender that is available to lend out the money, all lending platforms are being owned and sponsored by private investors.
One good thing about P2P lending is that the lenders can start with little capital and gradually build their capital from the interest they make, also P2P interest rate are sometimes lower than that of traditional Banks and many people have adopted P2P to help them build their financial system
Instead of saving money in the bank that comes with little or no interest investors decide to channel the capital to p2p lending website and this help to generate income through the interest depending on the amount the individual started with.
Facts about P2P lending is that there is no option for an intermediary like Banks that will always look for collateral before approving loan for business.
Advancement in technology has helped to create so many tools that helps individuals to access P2P lending website which has helped to achieve social goals and create opportunities for lesser loans.
Just like financial system P2P lending has many forms and there are some fees that are imposed on both the lenders and the borrowers
P2p lending types.
There are over seven types of P2P lending, micro lending that I mentioned earlier is a type of P2P lending that allows individual to borrow small amount of money in a short period of time with small rate of interest.
There is also the invoice financing P2P lending that secures its loan through invoices, they loan money to businesses and they also help them to manage their financial system through the use of invoice.
There is also the students P2P lending which is majorly for students, school fees and other school expenses like feeding clothing and textbooks can be covered with student P2P lending.
There is also the business P2P lending that is basically for entrepreneurs to help them expand and grow their business it's also comes with little rate of interest to help entrepreneur succeed in their journey of entrepreneurship, there's also the real estate P2P lending which is majorly for real estate expenses like buying houses, starting a construction, doing renovations and other things done by the real estate.
There's also consumers P2P lending that is majorly for individuals consumption used to buy personal things like wedding bills, medical bills and other things.
Some P2P lending are secured while some are unsecured.
Procedure of Peer-to-Peer lending
The lender will create an account in any P2P lending website, then he will deposit any amount of money depending on the type of P2P lending he wants to do, also the borrower would also create a financial profile that shows how much he wants to borrow and any available investor will respond and lend him the money by transferring the money through the P2P lender platform.
P2P lending is majorly for investors who have a certain amount of money they do not want to use at the moment.
The risks!
It has been sounding so good about how to lend money without collateral or intermediary but there are some high risk involved in P2P lending, and these risks majorly affect the investors just like in every other investment, is very important for an investor to know about those who risk and not to focus on just the attractive interest that comes from the investment.
The first risk is that the borrower might decide not to pay back since there is no collateral or intermediary and as a borrower keeps borrowing and paying back this help to build trust but there is also a risk that he might default one day.
P2P lending also faces liquidity issues making it difficult for an investor to access his investment when he needs its no matter how urgent it is.
P2P lending websites have different interest rate so there is every possibility that a borrower will look for site with little interest rate living investors In the other website with their investment especially when interest rate are being increased by the platform.
Also deceitful borrowers can provide fake information which will enable them to engage in fraud and cause huge loss for investors, when there are changes in regulation in the platform these affect both investors and the borrowers.
There are so many other risk like servicing risk, diversification risk, task risk and many more so investors should make proper research and also try having multiple account in different P2P platforms which can help them to set the realistic goals after considering the risks involved.
The reward!
Briefly highlighted the reward of P2P lending is quite attractive and its favors both lenders and borrowers because P2P lending is flexible so both investors and borrowers can choose any type of P2P lending they can as well choose the interest rate they can accept, also P2P lending can be easily access which have created a positive social impact to the economic system.
P2P lending is transparent so both investors and borrowers can see how the investment is going this can be monitored by downloading the apps from place to or visiting the website on daily basis.
Best reward of P2P lending is that it gives an investor the opportunity to end regularly as borrowers will always pay in their interest, and is also helps individuals to support and build their business and also solve other financial challenges.
Conclusion.
P2P lending benefits both lenders and borrowers with less stress unlike what we see in traditional Banks where loans are not easily accessed by small businesses but with P2P lending businessman, students, real estate can start up a business with little or no capital.