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How does Peer-to-Peer(P2P) lending work
How does Peer-to-Peer(P2P) lending work

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How does Peer-to-Peer(P2P) lending work?

When a borrower lends money from a lender without the involvement of a financial institution then it is called peer-to-peer lending. Peer-to-Peer loans are mostly personal loans and the borrower can use these loans for a variety of purposes from debt consolidation to house renovation or establishing and maintaining small businesses. But sometimes borrowers use it for crowdfunding for their big projects. Peer-to-Peer lending is also known as person-to-person lending or social lending and companies and that provide peer-to-peer lending investments are called peer-to-peer lenders or marketplace lenders.

Some companies allow everyone to invest in their loans as long as the investor meets the company’s minimum account limit and demonstrates the affordability of the loan. However, some marketplace lenders impose certain restrictions and only those can invest in their loans who meet their set requirements.

The working of Peer-to-Peer lending is quite different with respect to mainstream traditional banks or credit unions. Usually, when someone borrows a loan from a bank, the bank will use some of its assets to facilitate the borrower. These assets are basically other customers’ deposits made into their own accounts. But in Peer-to-Peer lending, generally, borrowers are matched with lenders on lending platforms. These lending platforms are usually online websites. The process of Peer-to-Peer lending is different for both borrower and the lender which are given in the below paragraphs:

For the Lender

For a lender to invest money in a peer to peer investment, first he needs to explore a lending platform and signup. The process starts when the investor invests his money on the P2P lending platform and makes it available for borrowers to borrow. Now you need to fix the amount of time for the availability of the loan. The longer you invest your money, the higher the potential returns will be.

After your investments are transferred to your peer-to-peer lending account, usually, it takes two days for lending to commence. There are two options for finding a borrower that matches your offer. Either you allow the platform to do it automatically for you or you could do it on your own manually. The automatic method is speedy and makes sure that your money is invested every time. While the manual method is quite time-consuming but it gives you maximum control over your investments and terms and conditions.

You will start earning interest as you have been matched with a borrower and the loan has been disbursed. If you want to further invest your earnings your lending platform might present you with different finance management options. Some highly efficient platforms will offer you automatic re-lending services which will automatically reinvest your earnings and maximize your returns.

The lending platform will allow you to draw a regular income from your returns, usually, on a weekly or monthly basis. Furthermore, the platform will also facilitate you with the options that will allow you to either draw full repayments or just the accrued interest. This could be done either manually or automatically.

For the lender

Just like a lender, to avail of a peer to peer lending service, the borrower must sign up on a peer-to-peer lending platform. The borrowing process starts when the borrower applies to a peer-to-peer lending platform for a loan. After the submission of the loan application, the corresponding lending company will require you to fill out a quote request and provide identification proof. Then a soft search will be made on your credit history and you will be assigned a credit score. Depending upon your credit score, you will be quoted a provisional Annual Percentage Rate(APR). Furthermore, this credit score will help in setting up the terms and conditions – amount, duration, monthly cost, and the amount payable – for the loan.

Now, your completed application will be assessed by an underwriter who will decide either your application should be approved or not. At this point, your request may undergo an in-depth credit checking process and you might need to meet the platform’s own creditworthiness checks too. Upon approval, the platform might provide a lender with a loan offer that will match your quoted criteria. You can either accept it or decline it.

The loan will come directly to you from a lender. The platform will only act as an intermediary and you won’t be dealing directly with any other parties. After receiving the loan, you will make regular payments to the lender through the platform. These payments could be on a weekly or monthly basis.

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