Over the last few years, the lending environment has changed drastically. Traditional financial institutions are limiting the amount of money they lend. In combination with this, they also tightened their lending requirements. This made it more difficult for both individuals and businesses to secure the needed financing. There are multiple alternative options now available (Modest Money has covered most of them). We want to help you on the road to understanding more about peer to peer lending.
What is Peer to Peer Lending?
Peer to peer lending is also referred to as P2PL. It is the option of receiving funds without going through a traditional financial institution. You receive the fund from “peers” or people that not related to you at all. You also will find this practice referred to as “crowdfunding” or “crowdlending”.
Types of Loans
This type of loan is unsecured. This means that you do not put up collateral to receive the loan. They are made to individual people. The most widely known area here is crowdlending where you post the amount of money you need and the purpose then individuals either bid on the loan or offer part of the loan amount.
These types of loans also can be offered by companies. We mentioned that these are not offered through traditional lending institutions. This refers to banks or other financial institutions. But, they can be offered by companies. Companies that frequently offer these types of loans are payday loan companies, secondary student loan companies, leasing, and factoring companies.
There are some common characteristics of any company and/or website offering peer to peer lending. They include:
- No prior relationship between individual borrowers and those willing to lend money
- They are conducted for the purpose of generating profit. They usually charge a fee for bringing lenders and borrowers together.
- The company acts as an intermediary
- Transactions are routinely done completely online
- People willing to lend money are able to choose who they lend to
- Loans are completely unsecured and are not backed by any government agency
- Individual loans actually become securities that the lender can then resell to a financial institution
This process started mainly through social media. People would create projects on a website then let people they knew contribute to them. This changed as the process became more common. Now, there are many websites that mediate these types of loans between people that have never met.
There is no doubt that the financial world changed drastically over the last 10 years. Part of this was the changes in regulation that came from economic downturns. But, part of it came from technology and the ability of people to readily communicate with those they have never met. Peer to peer lending is now a very common practice.
There are tens of billions of dollars lent this way each and every year. If you are looking for a loan and traditional institutions are not willing to work with you then you should consider using your new found understanding of peer to peer lending to investigate a non-traditional lending source.