What Is a Peer to Peer Loan?

Most people have financial needs numerous times throughout the course of their lives. The most common and way of getting a loan is to apply for it directly with a banker. The more modern alternative to this is to apply for a bank loan online. However, peer to peer lending takes the bank out of the lending equation entirely. When you learn more about what is a peer to peer loan, you may decide that this is the ideal financial solution for your current needs.

The Concept of a Peer to Peer Loan

The Internet has facilitated direct business activities and has cut out the middleman in a wide range of business activities. This holds true in the financial realm as well.

Traditionally, people would deposit their funds into a bank in their checking or savings account. The bank would not hold these funds in a huge vault indefinitely. Instead, it would lend the funds out to other bank members in the form of carefully underwritten loans.

The bank may have earned money on checking and savings account fees from the first party. While interest charges and loan fees from the second party fuel its second stream of capital. Essentially, the banks make money by storing one person’s money and lending it to another person.

Peer to peer lending shakes up this entire process, and you need to ask what is a peer to peer loan before you apply for your next loan so that you have a full understanding of what all of your options are.

The reality is that this is a rapidly growing sector of the financial industry. When you ask what is a peer to peer loan, you will see why so many people are taking advantage of the benefits of this type of direct financing.

Advantages and Disadvantages of a Peer to Peer Loan

With a traditional bank loan, you may apply for the loan through the bank directly or online. When you learn what is a peer to peer loan, you will discover that there are lending platforms. These platforms connect loan applicants with individual investors who have an interest in lending money.

The loan applicant will create a profile that shows investors his or her financial background and current monetary needs. In most cases, your entire loan amount will be generated from multiple investors rather than from a single investor.

This means that the risk that an individual investor faces by extending a loan to you is rather minimal. When you ask what is a peer to peer loan, however, you may be wondering what are the advantages of this type of loan structure to you as a borrower.

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Advantages of a Peer to Peer Loan

By learning more about what is a peer to peer loan, you will discover that there are a few advantages for this type of loan.

1. The loan amounts are similar to those of any other loan you may apply for through a bank

This means that you can use a peer to peer loan to meet most of your financial needs. Needs such as consolidating debt, renovating your home, taking a vacation and accomplishing many other expensive goals that you may have.

2. A peer to peer loan is usually a short-term loan

In fact, the term length usually ranges between one to five years. You can set it yourself or have the lending platform determine it according to the loan amount you request.

While there may be some disadvantages to having a shorter term, remember that a shorter term means that you will pay the loan balance off more quickly and easily.

Concerns about being saddled with long-term debt are not present when you take advantage of a short-term peer to peer loan program.

3. Most peer to peer loans are structured to ensure the borrower makes payments on time

This may be a safeguard for the investors who put their personal funds on the line. However, you may find that this type of loan is easier for you to manage. This is because many peer to peer loan programs have an automated payment requirement.

You will not have to worry about potentially making a payment late and accruing expensive late fees. In addition, this type of loan requires no collateral. So you do not need to worry about your collateral being seized or foreclosed on if you are unable to make payments.

Disadvantages of a Peer to Peer Loan

After you have asked what is a peer to peer loan, you also need to explore the disadvantages to determine if this is a feasible loan program for your current needs.

1. Short-term loans mean higher monthly payments

One disadvantage of a short-term loan is that the loan payment may be much higher than with a longer term. Remember that the loan payment amount can impact affordability.

While you do not want to take on debt that will take you many long years or decades to pay off. You also do not want the payments to be so high that they are burdensome or even unaffordable for you to pay on time and in full each month.

2. Peer to peer loan programs relate to the interest rate

When you use a secured loan for your financing needs, you will generally qualify for a lower rate than what you would qualify for with an unsecured loan. Because a peer to peer loan is an unsecured loan, the interest rate may be higher.

More than that, the interest rate may be graded based on your exact credit score. Those applicants who have a lower credit score may qualify for a much higher rate. This can create much higher loan payments.

3. Lending fees are generally higher compared to other financing options

You should be aware that the investors make money off of the interest rate charged to you. The lending platform used for the peer to peer loan program also may need to make a profit from the loan.

Therefore, you may find that the lending fees associated with a peer to peer loan program are rather high in comparison to some of the financing options available.

Conclusion

Because there are both pros and cons to consider when you ask what is a peer to peer loan, it is imperative that you carefully explore a few of the peer to peer loan programs in greater detail and compare them against some of the other more traditional financing options available to you. When you understand the pros and cons and compare all of the options thoroughly, you can better determine the right course of action to meet your current financial needs.