You have probably heard people talk about online lending, but you may ask yourself, “What is an online lender?” and “What makes them different from every other lender?” Online lending is a popular alternative method to getting a loan. Traditionally one would have to go to the bank in order to get approved for a loan or use a credit card, but peer-to-peer lending companies have become the new rage amongst borrowers.
Why People are Choosing Peer-to-Peer Lending Over Traditional Bank Loans.
Traditional bank loans are there to loan out money to borrowers. But because the bank investigates into the potential borrower, a lot of borrowers are loaned small amounts with high interest rates, and some are forced to have collateral in order to even get accepted for a loan. This means the borrower needs to have something such as their house or car as a guarantee on the loan just incase they default. And sometimes the borrower can get denied completely. This is where online lending comes in. People begin to go to online lending once they know that they are unable to get a loan through the bank, because it allows people who might be considered too high risk, or people avoiding to put down collateral to still be able to receive a loan.
What is Peer-to-Peer Lending?
Peer-to-peer lending allows individuals to finance their debt by borrowing and lending money without using a financial institution such as a bank; thus removing the middle man from the equation. This type of loan is appealing to borrowers because it is quicker and easier than getting a traditional loan. Peer-to-peer lending allows borrowers to receive financing that they might not be able to receive elsewhere, but it does come with a risk. The downside of peer-to-peer lending is that the lenders do not have as much certainty that the borrower will repay their loan and in order to counterbalance this they have to increase the interest rate on the loan. Increasing the interest rate makes investing into peer-to-peer lending more tempting because it is high risk – high reward.
How Does Online Lending Work for Investors?
Online lenders typically go through a screening process for each potential borrower, and when they are approved, they then grade that loan based on the risk factor for that client, and estimate the return for that loan; thus, allowing investors to invest and diversify their portfolio. The investors start to receive their money when borrowers begin to repay their loans.
Thoughts on Peer-to-Peer Lending for Investors and Borrowers.
Overall online lending companies can be beneficial to both the investor / lender and the borrower. Borrowers are given the ability to get a loan even if they are high risk, and investors / lenders are able to profit off of peer-to-peer lending.
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