What is Peer to Pear Lending (P2P Lending)?

by Investing School on September 15, 2010

The phrase “peer to peer lending” (which is also known as “P2P lending” or “social lending”) refers to a specific type of debt financing that allows people to circumvent the traditional, official financial institutions in order to lend and/or borrow money. The advantage for the persons involved is that peer-to-peer lending effectively takes the banking middle-man out of the lending process. However, because of this peer to peer lending requires more time than traditional lending. It also involves a more substantial effort and considerably increased risk to the lender than those loans obtained through a traditional financial institution.

One of the main reasons that peer to peer lending resonates with the lenders is because these loans create income which comes to them as interest. The amount of interest from a peer to peer loan is often higher than the amount of interest to be earned through more traditional lending plans. Peer to peer loans may be popular with borrowers because it can offer them financing for which they may not qualify at a regular financial institution.

There are disadvantages to peer to peer lending, as well. For example, lenders may have significantly less assurance that the borrower will repay their loan, because some qualifications may not be required. Additionally, because the lenders assume higher risk with peer to peer loans, the interest charge may be higher than that of a traditional prime loan product.

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