Crowdlending has proven to be able to provide an answer to any kind of situation in which you need to get some cash immediately. It may be cash to buy a car, reduce or consolidate your debt, pay for a wedding, start a small business, or replace any home appliance that has just died. You could, of course, go to the bank, but it is not guaranteed that your application will be accepted. Your friends and relatives may also not be in a position to lend you money. And if you don’t want to accumulate your credit debt, the crowdlending loan could just a great option for you.
It is not only for borrowing money, but peer to peer lending can also be an excellent opportunity if you are looking for new ways to invest your money. Lending your money to borrowers in a P2P platform will earn you passive income monthly. Moreover, you can diversify your investments in P2P lending and potentially lower your overall risk.
Before we look at the pros and cons of P2P lending, first let us gloss over the concept it.
Peer to peer lending anonymously matches up borrowers and lenders through an online platform using some computer algorithm.
Typically, personal loans range from $1,000 to $40,000. Normally, higher amounts are available for lines of credit and small business loans.
The terms of the loans usually range from one to five years.
The monthly payments for borrowers are fixed and are automatically deducted from their bank accounts verified by the platform.
P2P lending marketplaces do not include any physical branches, thus lowering the costs for borrowers and boosting the returns to investors. Crowdlending platforms earn by charging borrowers origination fees and deducting fees from the loan repayment made to lenders.
Peer to peer lending began in 2005, with UK-based Zopa the first platform to launch.
The banks are not totally cut out of the equation. The banks hold and transfer the funds between the parties.
There are a number of reasons why crowdlending is so popular among consumers, including low interest for borrowers and the ability to diversify for investors.
Pros and Cons of peer to peer lending
Getting a personal loan from P2P lending is an attractive prospect for borrowers as it is a perfect alternative to traditional banks. On the other hand, investors can add crowdlending loans to their investment portfolio to diversify and reduce risk.
But regardless of which side of the equation you are on, lender or borrower, it is important that you understand the pros and cons before getting into peer to peer lending.
Pros of Peer to peer lending to Investors
There are many choices for lenders to invest their money, such as stocks, CDs, bonds, real estate, or mutual funds. However, P2P lending offers an alternative to those traditional options, and with many advantages:
- Investors can be institutions or individuals
- Easy and fast to open an investment account
- The initial investment can be as low as $10
- You can diversify by investing in a portfolio of hundreds of loans
- Receive your principal alongside interest monthly as borrowers repay their loans.
- You can decide whether to reinvest their payments or withdraw them from your crowdlending account
Cons of peer to peer lending for investors
- The risk of loan defaulting still exists
- To maximize your returns you need to diversify
- This is not a get-rich-quick scheme
Pros of peer to peer lending for borrowers
There are many advantages of P2P lending for borrowers:
- Easy, the intuitive online application process
- Doesn’t impact your credit score when you check your interest rate
- Lower interest rates than credit cards and other traditional financial institution
- Fixed interest rates and monthly repayment; no hidden fees
- No need to have any prior interaction with the lender; they won’t contact you directly
- No prepayment penalty if you clear your loan early
- Loans are unsecured, thus, no need to attach your asset to the deal
- It creates a sense of community
- You can ask for additional loans
Cons of peer to peer lending for borrowers
- High-interest rates still apply
- Can’t allow borrowers with bad credit
- Lack of interaction