Peer-to-Peer Lending

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Peer-to-Peer Lending.

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Peer-to-Peer Lending

Understanding Australian peer-to-peer lending

Those seeking financing have more options today than ever before. Similarly, investors interested in making money in a different, higher interest manner may like the idea of peer-to-peer lending. However answering questions like what is it? how does it work? and are there any special considerations or other protections in place? is important.

What is peer-to-peer lending?

Peer-to-peer lending is much like bank lending; however, instead of being between a large institution and a borrower, it is between two “peers” meaning people (although it can usually be via a company). There is no incumbent bank in the middle between the loan and the funding. It is an excellent means for creditworthy borrowers to get financing, often at better interest rates than the banks and with more flexible terms than they would find at an institutional bank. It is also a great way for investors to make considerably more interest than would be available from most other forms of investing, and the investment is significantly safer than other options with comparable rates of return.

Typically, it is a service that connects lenders or investors with borrowers and is usually done so via an online platform. This provides a means of keeping individuals’ respective personal information confidential while allowing for the necessary credit checks and fund transfers. It also makes the task of pairing lenders and borrowers much simpler for the people involved.

Most people use peer-to-peer lending because of the favourable terms on both sides of the deal. As we mentioned borrowers can often find financing at rates that are significantly below the market average. Meanwhile, lenders can see returns several points higher than anything they could hope to get from a savings account, CD, or other low-risk investment. The key difference is the speed and the underlying technology used by the platforms.

How does peer-to-peer lending work?

Typically, lenders register for a service that matches lenders and borrowers. There are different levels of involvement, ie. some platforms handle the entire borrowing approval and just pay investors a set interest rate for participating or with some platforms, once registered, the lenders can select options such as acceptable credit scores, amounts they wish to lend, and agreeable payment terms. They can browse listings and get a feel for the loans and any security available. For those who have never engaged in peer-to-peer lending before, most of these sites are designed to walk the lender through the process, so no advanced understanding of lending practices is required. Once the registration is complete, the prospective lender pays the amount they wish to put towards the loans, then monitors and collects the interest from their investment.

Borrowers, on the other hand, go through a similar process to the typical loan application they would find on banks’ websites. The borrower selects the financing product they desire etc. Just as with a bank loan, the borrower then selects the amount they want to borrow, fills out a credit application, and is then approved (or not) based on their loan application, security and creditworthiness. Generally, peer-to-peer lending is best for those with good credit, security or strong serviceability. The interest rates and terms available may be much more flexible than those available from major banking institutions, making them much more attractive to those who qualify.

Typically, the borrower and the lender never meet in person; everything is done through agents of the peer-to-peer service or online. Aside from names and other information necessary to finalise the transaction, most personal information is kept private for the safety of both the lender and the borrower. This information is held in confidence by the lending institution and can be used to enforce the lending agreement should a disagreement later occur.

Other considerations for peer-to-peer lending?

One of the concerns for parties involved in peer-to-peer lending is the legal protection afforded to the parties. This will depend on the security for the loan and the structure of the platform. Does the platform hold the loan in their name for the lender or does the lender hold the loan in their own entity? It can vary greatly. Many of these services will handle everything for the entire process of originating, collection, and enforcement for a lender, while others leave enforcement to the lender.

Regardless of the service level offered, loans created through these services are every bit as enforceable as anything created by an institutional bank. A full contract is created between the parties (often with the service involved as a third party). In the event of a default by either party, the agreement can be enforced in a court of law and any security provided recovered against. Similarly, the peer-to-peer lending service may provide other functions useful to the loan enforcement process, like credit reporting and collection calls.

Who is suited for peer to peer lending?

Peer to peer lending can be for the masses. Usually, financial savvy individuals will weigh the pluses and minuses of banks versus peer to peer lending and then choose the one that will benefit them more. For example, if someone can borrow more from a peer lender than a bank and get a lower interest rate, than peer lending makes more sense.

As you are seeking peer to peer lending, make sure to research the lender and site you are using. You don’t want to end up being taken advantage of by people who aren’t reliable or untrustworthy. By finding the right company, you can find that this option is better than any other one you can find at a traditional lending institution.

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