Many of us come across a situation where there is an urgent need for a certain amount of money. In today’s world, where e-commerce is becoming a part of daily life, the process is much simpler. You can borrow money from a completely unfamiliar people via P2P lending platforms. People use the internet for peer-to-peer telephony (Skype) and shopping (eBay), so why not loans?
Peer-to-Peer (P2P) lending is to the direction of crediting in which the lending and borrowing take place directly, without intermediaries such as banks and other credit organizations. In other words, P2P lending services match borrowers and lenders via online auctions.
The borrowers in this case are US residents that need money for paying off credit cards, financing a medical expense or improving their house. General speaking, the borrowers are trying to get an interest rate which is below what they would have to pay to a credit card company. Like a mortgage, these loans are amortizing, meaning that the borrower makes regular payments of interest and principal.
How does this work?
The main functions of P2P platforms are:
• to collect and publish applications specifying the desired terms of loans from both potential lenders and borrowers;
• to transfer funds through a global network on the specified terms.
Also, as in the usual lending in case of a delay of loan repay collection agencies that work with the borrower are involved. In the case of impossibility to collect funds at the pre-trial stage the deal goes to court.
Information for the lender to be considered:
Interest rates are higher than the bank deposit;
Higher risk of default, but it is possible to choose whom to give a loan and specify the amount of the loan;
An opportunity to diversify your risks giving all the required amount of loans not to one borrower, but to a variety of borrowers;
The return of the invested money with monthly interest, banks offer such deposits, but with a very low interest rate;
Ease of use, as everything takes place online on the website and it is not necessary to go anywhere.
Information for the borrower to be considered:
The ability to specify the time, amount and interest rate at creating an application for a loan;
The ability to increase your chances of getting a loan by providing more information about yourself, as well as using electronic signature (digital signature);
No hidden fees, usually P2P lending services charge a fee once for giving the loan.
There are tens of thousands customers of P2P resources now, all being citizens of different countries. For example, with the help of the private P2P lending a great number of people refinance loans taken from banks in the United States. goals, for which a private loan is taken, can be very different.
Logging on the credit site supposes passing strict control of data: it is necessary to enter the address, passport details, a social security card number. Automatic control system of borrowers denies loans for unemployed people are or people with bad credit history.
But P2P sites do not give absolute guarantee of the loan repayment. To reduce the risks of loan non-repayment each borrower is automatically assigned a rating, based on the data from credit bureaus. It is from the borrower’s rating that conditions of a loan granting depend on. The size of the loan can amount to several thousand dollars, and the average loan term is 3 years. The lender may lend funds, either directly or through investment programs. both borrowers and lenders are charged the fee for services of the credit network.
Late Payments & Defaults
Investing in peer-to-peer loans can provide you double digit annual returns. However, you need to be prepared for defaults. Many borrowers aren’t going to pay off the full amount they owe. Ironically, a large number of defaults may be a sign that you’re investing correctly.
What should you do when you see a default or late notice in your peer-to-peer account?
In most cases, the correct answer is nothing. Here are a couple tips that will make it easier to sit on your hands.
If you know that each loan only represents a tiny fraction of your portfolio, you will be less likely to have a reaction. Diversify among several hundred issues.
For example, you own parts of 800 loans, where each loan equals less than 0.2% of your portfolio. And if you come across with a default, the loss will be very small.
Analyze the worst case scenario, assuming that all the loans that are late will default. You have to subtract the amount from the value of the portfolio and calculate your returns. Even under the worst case scenario, your returns are over 10%. It’s a good investment even when including defaults.