Banks charge a heavy premium amount on loans and also a soaring interest along with it. The difference which banks charge from the loan rates and interest rates for Savings Account is huge. This way, the borrowers end up paying excess money.
This particular form of loan has changed the world of lending. These loans are facilitated by individuals and investors, and not from banks. In P2P, a loan can happen between any two people. They can set up a loan and repayment arrangement according to mutual benefits, preferably in a written argument.
P2P lending is usually initiated by an online service platform that handles the logistics of both the borrowers and the lenders. Besides providing agreements, borrower evaluation and payment processing, P2P lending makes it easier for people to connect on the same platform. Here, one not only knows the people from one’s community, but also has access to a wider community.
Direct loans, popularly known as P2P loans, do not come from traditional lenders like banks, finance companies and credit unions. Instead, the money is borrowed from another person. One does not have to pay interest on the loan also the chance of approval and is higher from one of these over a traditional bank loan.
It is an online model which executes borrowing and lending, and both the parties are in a win-win situation. The borrowers get cheaper loans and the investors get good return on their investments.
A bank loan can be expensive for the borrower as it entails charges like processing fee, late payment, pre closure charges and other fringe costs. With P2P lending, most of these charges are not there. The charges are minimal with justified interest rates.
There is always a reason why people choose one thing over another. P2P loans help solve two of the biggest challenges faced by borrowers: sanction and cost.
P2P loans are less expensive than the loans available from traditional lenders. Applying for such a loan is often free of cost, and the origination fee is often a small percentage share. Most importantly, such loans offer a lower interest rate as compared to bank loans.
Investors using P2P lending do not have major overhead costs as the banks with extensive branch networks. They mostly offer their savings to the borrowers and hence provide a low interest rate and often have fixed interest rates, so that the borrowers can have an estimation of their monthly payments.
Traditional lenders with banks and other institutions only prefer people with high credit scores and good debt-to-income-ratios. In P2P lending, the lenders are also willing to work with borrowers who are in the process of building their credit. Hence, the borrower stands a better chance at his approval. With less-than-perfect-credit, the borrowers have a decent chance at getting the loan approved at an affordable interest rate.
Each lender is different, but the major idea is that there are a lot of people who wish to earn more from their money than they get from a regular savings account. Thus, they are willing to make reasonable loans and are looking for borrowers.
Various financial sites serve as marketplace to connect lenders and borrowers. The process is mostly simple:
Be eligible for the set standards: When borrowing, one will need a decent credit standing. In P2P lending, the lenders often set a limit on their risk taking ability, and one has to work according to that. If one has a stable income and high credit scores, one will definitely fall into the lower-risk categories, and stand a good chance of getting the loan.
In P2P lending, the lenders are interested in knowing the borrower and his plan with the loan. The application is accepted only after one fills the relevant details. The time for funding can vary between instant to a week, depending on the investor’s decision.
Cost: While applying for a loan, one should make sure to factor in the interest cost before setting the loan amount. The interest rate will depend on one’s profile- the better the profile, the lower the interest rate.
In P2P loans, the loan is generally repaid over a period ranging from two to five years. Payments are easy to make, and one is notified of it earlier.
Mostly, in P2P lending, the lenders report the borrower’s performance to credit unions. Hence, timely payments of the loans, will definitely help improve one’s credit standing in the market. However, if there is any default, the credit standing may suffer a major setback.
These loans mainly started out as unsecured quick personal loans i.e., the borrowers do not have to pledge any collateral against the loan. Also, one will not be questioned about the purpose of your loan.
However, these days specialized lenders have started asking for collateral as security against the loans provided by them. They also intend to know the specific purpose of the loan.
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