Peer loan – how it works and what are its risks?

By | November 21, 2018

To understand how peer loans work, it is necessary to know what peer loans actually are. Usually called P2P loans, peer loans actually provide a platform, mostly online, for borrowers to find lenders that meet their needs. One benefit of peer loaning is that the requirements are less and it is easy to approve a loan which would otherwise be rejected by a financial institution. In peer to peer lending, other costs are reduced significantly as the lenders and borrowers are operating online and this eliminates the need of a proper physical office. This reduces expenses to a greater extent. The lenders in peer loaning are at a higher risk that the borrower may default as he has not such a good credit history to get his loan approved from some other financial institution. Due to the same reason, the interest rates charged by the lenders are comparatively higher.

It gives a good opportunity to people who have some idle money and want to invest it somewhere. It is because the interest rate they charge to borrowers is comparatively higher as compared to the profit rate they will get if they open a saving account with a bank and deposit their money over there. But again the chances that the borrower will default are high.

Peer loans can be both secured and unsecured. Secured loans are backed by some kind of security like jewels and other valuable objects. Personal loans are also given through peer to peer lending. Another drawback of peer to peer loaning is that lenders have to manage their funds themselves. They have to select the borrower among the prospective candidates and then make sure that the borrower returns the payment. It is not easy for everyone who wants to invest his idle income in lending to do all this. There are always the chances that the borrower will default and not everyone wants to take this risk. Although the online sites are facilitating to provide a platform to both the parties but, in the end, it is the lender who needs to understand how peer loans work. Another problem with peer to peer lending is that it is not allowed in every state. Due to the high risks associated with this type of loaning, not all the states allow this. So, the number of people who can utilize this option become less comparatively.

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