#Peer-To-Peer Lending (or P2P) is an alternative way to attain financing by allowing individuals to obtain loans from other individuals, this way, the financial institution will be removed as the middleman it usually is when lending out to individuals.

#P2P lending has also been known as “social lending” or “crowd lending”. Peer-To-Peer Lending is a fairly new concept as it has only existed since 2005, however, there’s already a mass of competitors that include Prosper, Lending Club, Upstart, and more.

In simple terms, Peer-To-Peer Lending (P2P) is a form of new financial technology that permits people to lend out their money or borrow money from each other without ever having to go through a bank.

The job that websites that have P2P lending do is connect users that are borrowers to users that are investors willing to lend out their money in order to make a profit. The websites set their own rates and terms and enable the transactions.

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What are the Pros and Cons of Peer-To-Peer Lending?

P2P loans offer greater convenience to individuals compared to traditional lending methods. However, the rates for P2P loans are on average excessively higher than rates from traditional loans like from banks.

Some thoughts to keep in mind before considering participating in Peer-To-Peer Lending

One important fact to keep in mind about P2P lending is that if you’re lending out your money on any P2P website, it is possible that the people you loan out your capital to could default on their loan, similar to what also can happen to banks’ loans to lenders. There’s been research done on P2P lending that has concluded that defaults are exponentially more common on P2P lending platforms than in traditional financial institutions, sometimes the rates of default are higher than 10 percent.

While P2P is a fantastic innovation for financial technology, it is riskier for investors than safer investments like savings accounts or certificates of deposit, (CDs) and it is also risky for borrowers because the interest rates are often very high. Most people shouldn’t ever borrow P2P loans because of the high rates that make them pay way more money at way higher rates than any traditional bank would. The average person that borrows P2P loans usually is living paycheck-to-paycheck and therefore needs money for an emergency that will be paid back in their next paycheck. P2P loans should only be borrowed as a last resort for emergencies.

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