A peer-to-peer loan is a type of loan where an individual borrows money from another individual. Peer-to-peer loan is also referred to as social loan and peer to peer loan. A person who has too much capital in relation to their needs may agree to lend money to another who does not have enough money. In this case, the amount to be borrowed, the repayment period and possible interest will also be agreed.
The smaller the loan amounts and the closer the personal relationship is, the more informally the loans are usually negotiated. Often friends borrow small amounts from one another and the money is agreed to be repaid the next time they see you. When it comes to larger amounts, the lender may feel more secure if the loan is secured by a written agreement that records the interest and the repayment period. You may also need to talk about collateral.
Often, as the amount of loans increases, the nature of the contracts is divisive. Loans to your closest relatives or most trusted friends are inherently more social. In these, the wealthier party wants to be of help, and then provides a loan at often favorable terms. On the other hand, the second trend is more investment-driven, with a higher interest rate on the loan, strict terms and conditions, and often the introduction of collateral.
In this case, the loan may also be partly like an investment, in which case the lender will be offered a shareholding in the company or the right to convert part of the debt into shares at a later date.
History of the peer loan
Historically, lending has been based on the capital accumulated by one or more wealthier individuals, which has been lent to persons they consider appropriate. Today’s banks operate on the basis of depositors’ money being pooled, whereby banks lend on a money-creation ratio, without forgetting the minimum reserve system.
Nowadays, the value of money is not tied to anything solid, like precious metals, so banks benefit from how easy it is to create money. This can be seen in increased efficiency. For these reasons, peer-to-peer lending may be very small compared to bank loans.
Peer loan operating models
Micro-loans to developing countries
Some loan sites offer the opportunity to lend to entrepreneurs in developing countries, for example. Such loans are usually quite small, ranging from about $ 300 to $ 3,000, and the lawmakers receive no or very little interest on their investment. This will give borrowers in developing countries the opportunity to borrow at very reasonable rates. The key objective of this model is to provide people with assistance to help them overcome poverty through their work.
Loans without collateral
Most Western countries already have a model where the consumer can take a credit card and a bank loan. In this case, the service provider bills and manages the contracts, but the risk of repayment lies with the lender. So far, lending is only possible locally.
Loans between friends and family
In such a model, the loan is negotiated between familiar people. Often this is done entirely by individual agreement, but the services of the service providers allow the loan to be formalized and the fees collected. The quote site provides a template for contracts and help you focus your money flow on people you are already familiar with.
Advantages and disadvantages of a peer loan
The purpose of peer-to-peer loan models is to bring back the social characteristics of lending, which have disappeared completely from the traditional banking model, but also involve diversification and risk management. Utilizing web-based technology, it is possible to bring together credit applicants and lenders in real time. Networking reduces the cost structure, as physical office space is not a challenge or a cost.
By leveraging these factors, we seek to achieve a win-win situation and cost for both parties. In a peer-to-peer lending, the bank is left out as a party and thus the lenders receive a higher interest rate on their capital, while the borrowers get a lower interest rate than with traditional financial institutions.
The main problem with a peer-to-peer loan is that it is difficult to find investors. Part of the reason for this has apparently been the crisis in the economy, but confidence building has also been a problem. Some site investors have also been disappointed with the returns they receive. The spread of peer-to-peer loans has been slowed down by regulatory oversight.