In recent years, the consumer credit market has gained a new type of product. Peer to peer loans are a recent innovation in the consumer credit market, and have become popular with both borrowers and lenders in a relatively short space of time.
What are Peer to Peer Loans?
Peer to peer loans, also known as social loans, person to person loans, p2p loans or peer loans, are loans which do not involve large financial institutions like banks and building societies, or loans companies. Rather, as their name suggests, peer to peer loans involve lending between small investors and borrowers, with the small investors often being borrowers themselves.
After the recent financial crisis, traditional financial institutions such as banks and building societies tightened up their lending criteria, meaning it was much more difficult for borrowers to obtain loans, even those with a good credit rating. New technology meant that peer to peer lending was able to fill this gap: people were finally able to lend directly to each other over the World Wide Web in a supervised and regulated manner. With the big financial institutions removed from the process, peer to peer loans should be cheaper for borrowers and more profitable for lenders; this is the main reason for their growing popularity.
How do Peer to Peer Loans Work?
Peer to peer loans involve a person or organisation lending directly to another person or organisation without the involvement of a financial institution, but with the involvement of an intermediary (usually one of a range of specialised peer to peer lenders).
Once a borrower requests a loan, then an interest rate for the loan is set. This is either done by the intermediary after an assessment of the borrower’s credit rating, or is done by the lenders themselves: informed by the intermediary’s assessment of the borrower they bid on the rate to offer the borrower, with the lowest rate being the rate set for the loan. To this interest rate are added any relevant loan charges; then a quote can be made, which the borrower can decide to accept or refuse.
The best peer to peer lending, therefore, offers a competitively priced loan which allows the borrower to borrow affordably, the lender to make a profit on their investment and the intermediary to secure a reasonable fee for the services they provide.
Peer to Peer Payday Loans
Given the increasing demand for payday loans, it was inevitable that the peer to peer loans market would evolve to include them. Now peer to peer payday loans are being offered to borrowers in much the same way as standard peer to peer loans have been offered, meaning that those seeking loans of small amounts to pay back in a short period of time have the option of lending from other people rather than financial institutions. The advantage of this is that peer to peer payday loans are likely to have lower interest rates than normal short term loans; however they are still likely to be very high when compared to standard personal loans, and debt problems could still occur.
Peer to Peer Business Loans
Peer to peer business loans are also becoming a significant part of the credit market. They allow small investors to lend to businesses directly, which is welcomed by the commercial sector as many companies and small businesses have found it difficult to raise credit via the normal channels. In addition to this, peer lending is starting to provide competition that in time should force mainstream lenders to lend more competitively.