Small time entrepreneurs and individuals found a cheaper option to finance and start their businesses online. With banks offering high interest in loans, credit investigations and onerous amortization obligations, online communities raised money and lend it to complete strangers. This is called Peer to Peer lending or P2P.

Peer to Peer lending is a type of “social lending” wherein the lender can invest money to finance a loan application from a struggling entrepreneur or any prospective person with reasonable need to acquire loans. These loans are needed to start up a business, finance a significant project or help someone to start at business and become productive.

Investors can pool their resources to fund a loan, then send it to the online marketplace and delegate the collection process to a collecting agency and charge them with rates lower than what banks offer minus the administrative process.

Loans are divided among lenders and payments are sent directly to the peer to peer sites which then distribute the money to lenders and report non payments to credit agencies or collection firms. Formal arrangement seems to make people more conscious about repayment terms without any bank involved in the process.

Peer to peer lending all started when consumer’s started to doubt financial institutions capabilities of helping them alleviating from loan payments with high interest rates and therefore, their ethics was being questioned. The maverick online companies’ attitude toward this predicament is if they can get this done cheaper between ourselves, what do we need a bank for?

There are several variations of Peer to Peer Lending on the Internet, Online Marketplace model and Family and Friend Models are two examples of how peer to peer lending works. The marketplace model of peer-to-peer lending connects borrowers with lenders through an auction process in which the lender who offering the lowest interest rates wins the borrowers. Some loans are packaged and resell the loans but ultimately, they are sold to different individuals.

The “family and friend” model lets go the auction process and concentrates on lenders and borrowers who already have prior knowledge of each other and formalize an online collaboration and debt servicing. The advantage of the “market model” benefits the borrower with its match-making aspect to the lender that offers the lowest interest rate for loans. These loans are unsecured and therefore, risky.

Several peer to peer lending sites help assist in connecting investors with borrowers. In a variation of the Online Marketplace model, these loans are regulated by the website that connects the lender with the borrower. The online marketplace computes risk assessments by running credit checks and takes care of the collections process for the lenders. At the same time, they streamline the process for the borrowers who may have trouble getting loans from traditional banks.

There are advantages for both the borrower and the lender in this scenario. The borrower is able to obtain a loan for their needs at an interest rate that may benefit them better than what they would receive at a bank. At the same time, for the lender, the profit they receive from the interest rate of the loan will earn them better returns than from traditional investments. Many investors believed that they get higher returns from 11-13% returns without much management while borrowers get lower rates and less hassle.

Peer to Peer lending can be a win win situation for both the borrower and the lender. To learn more about peer to peer lending strategies, visit my blog about making money online.

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