What is peer-to-peer lending?
Peer-to-peer lending (p2p lending) is a type of credit through digital platforms that connects investors with users who require financial support. In p2p lending, there is no bank as an intermediary, but rather financial services technology companies.
Technology has greatly modified many of the processes we know, one of the most significant transformations we have seen is the collective economy. Have you heard about this concept? It is very likely that it is even something you live with in your daily life and you have not realized it, let’s explain it to you.
The collaborative economy refers, as its name suggests, to the collaboration that exists between people, be it regarding finances, consumption, knowledge, among others. This term includes all those actions such as: selling, lending, renting, exchanging and some more, with the aim of satisfying certain needs.
An example of the most known and used are the different companies that offer transportation to users through an application where they rent private cars. In the list there are also food services, renting places to stay, among others. Now, this concept also includes economic aspects, such as loans between people, let’s learn more about them.
How does peer-to-peer lending work?
P2p loans work as follows: they are financial services platforms that rely on technology to act as intermediaries between investors and people looking for a loan, their processes, step by step, are as follows:
- Through applications or websites people can apply for a p2p loan.
- These companies determine the terms and conditions, including interest rates.
- Applicants have a financial profile, which assigns them a risk category and, based on this, the interest rate is generally established.
- Once the profile is created, it is published so that lenders can begin making loans.
- In some cases the applicant can review the offers they have and accept one.
- Then the monthly payments and loan characteristics are established.
- Through technology, the platforms enable the transaction.
In different parts of the world, these sites specialize in groups that share certain characteristics, for example, those seeking small business loans.
Characteristics of peer-to-peer lending
Peer-to-peer lending has some elements that distinguish it from other similar financial products, some of these are:
- Their interest rate is usually around 5-25%, generally considered low interest when compared to traditional alternatives.
- The amounts that are lent vary, from small to quite significant amounts.
- The procedures are simple and fast. A point in favor of technology companies, they eliminate many of the factors that make it complicated for the user to apply for a loan in a physical space, such as traffic, lines, and schedules. Loans between people can be processed from home, if you have a device and internet connection.
- No collateral or down payment is required for p2p loans.
- Most platforms only allow loans to people who can prove they have a good credit history.
In conclusion, peer-to-peer lending offers a new alternative to users, it is considered that by breaking the barriers of the banking intermediary, people can access fairer interest rates and investors, for their part, have good rates of return.