The personal loans market is in the lethargies. Traditional banks and other financial institutions have tightened credit criteria, resulting in lower credit availability due to more focus being directed to responsible lending practices. However, there is another source of personal loans that are relatively new called crowdlending or peer to peer lending, P2P lending, or marketplace lending.
Crowdlending has been around since 2005, but the industry has experienced massive growth ever since, with the United States, China, and the United Kingdom the leading p2p market.
Peer to peer lending enables consumers to have an alternative place to obtain personal loans, business loans, or real estate loans. This has been important especially for consumers with not so good credit history.
Traditionally, banks avoid as much as possible to take risks, but this does not mean that a risky borrower is a dead beat borrower.
Getting started with peer to peer lending is easy since everything is automated. Borrowers and lenders don’t have to meet; everything is done online.
So what exactly is crowdlending? Crowdlending match regular people who want to loan their money to ordinary people who want to borrow money.
Peer to peer lending is the best means available for borrowers to save money and investors to earn monthly income.
In theory, peer to peer lending takes out traditional financial institutions that have for long played the middlemen, thus eliminating the unnecessary costs for borrowers and increasing the returns for lenders (investors). However, the role of the middlemen has simply changed from traditional banks to crowdlending sites such as Mintos, Crowdestor, Grupeer, and Monethera.
These peer to peer lending sites provide valuable services to both investors and borrowers. For example, they check the credit history, income, debt-to-income ratio, as well as other criteria of possible borrowers. They also set minimum underwriting standards that every borrower must meet to qualify for a loan. And last but not least, they deliver this information to investors, without disclosing the identity pf the borrowers, so that they (investors) can evaluate the risks as well as the returns of a loan or loan portfolio.
How p2p works for borrowers
Borrowers who can’t or don’t want to borrow a loan from the bank or other traditional financial institutions can use peer to peer lending. Different platforms have their unique processes, but in general, borrowers should expect a process like this:
- Fill a short form. This is a soft credit check.
- Based on the credit check, you will receive a loan grade.
- Your loan application and grade will be reviewed by the investors to decide if they will fund your loan.
- When enough lenders (investors) are interested in your loan application, it will be approved for funding.
- You will be asked for some documentation such as proof of employment, current debts, and income.
- The loan application is reviewed to ascertain that the provided documentation matches the information provided in the short form in the first step.
- Upon the final approval. The loan documentation is sent back to the borrower to be signed and returned. The funds are then wired into the borrower’s bank account within 24 and 48 hours.
How peer to peer lending works for investors
Investors can go through the borrower profiles and decide using that information if they want to fund the loan.
Most loans are funded by more than one investor. There is usually a minimum to invest, but once the investors meet that, they can choose the maximum they want to lend each loan. This is what is called diversification in p2p lending. If one lender defaults – which is always a possibility – you are cushioned from the loss because you have all other borrowers paying you back.
As the borrowers make their monthly payments, a percentage of the amount goes to the investors until the total loan, including interest, is completely paid.
Most crowdlending platforms allow everything to be handled online; the documents and forms can be exchanged via email. This streamlines the entire process tremendously.