Peer-to-Peer Lending
Candlefocus EditorThe biggest advantage of P2P lending is that it eliminates the middlemen like banks and can be more cost effective for the borrower. Borrowers can get loans quickly and easily, often at lower rates than from banks. Borrowers can also customize their loan terms to meet their needs, such as loan size, length of loan, repayment frequency and more.
The biggest risk in P2P lending is a potential default by the borrower. It is the investor’s responsibility to assess the risk of the loan to determine their potential return on investment.
Most P2P lenders use a third-party credit platform to minimize the risk. This platform screens out potential borrowers by assessing their creditworthiness, such as credit score, income, and debt-to-income ratio. The loan is then assigned a credit grade, or “grade of risk”, based on the platform's assessment of the borrower's financial situation.
Generally speaking, the higher the grade of risk the loan is assigned, the higher interest rate the borrower will pay.
Overall, peer-to-peer lending is a great way for investors to get better returns on their money, and for borrowers to access more affordable borrowing options. It is an effective and efficient way to move money around the world while mitigating some of the risks of traditional borrowing. For the most part, P2P lending offers both borrowers and lenders a way to reap the rewards of a mutually beneficial agreement.