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Peer to peer lending: what you need to know


According to a recent report conducted by Globe Newswire, the market of Peer to Peer lending was valued at $82,300 million in 2021, which is expected to reach $804,200 million by 2030, growing at a CAGR of 29.1%.

 

Peer-to-Peer lending platforms have emerged as a popular alternative to traditional lending institutions, which can have rigid lending criteria and long approval processes. Borrowers can access quick and easy financing options, while lenders can earn higher returns than traditional investments through interest payments.

Working of Peer to Peer lending

P2P lending platforms typically follow these steps:

  1. Borrowers apply for a loan by providing their personal or business information and loan requirements.
  2. The platform evaluates the borrower's creditworthiness and assigns them a credit score or rating.
  3. The loan listing is posted on the platform, where investors can review the borrower's information and invest in the loan.
  4. When the loan is funded, the funds are transferred to the borrower's account minus any fees charged by the platform.
  5. The borrower makes monthly payments, which are distributed to the investors based on their investment amount.

Pros of Peer-to-Peer Lending

There are several benefits of using Peer-to-Peer lending. Some of them are given below.

  1. It generally provides higher returns oniInvestment than other traditional lending methods, which is why people now love P2P lending.
  2. P2P lending has lower interest rates than other lending methods because of greater competition with the lenders.
  3. According to different investors as well as lenders, P2P lending is easier to use than other lending methods, which is why investors choose P2P lending methods to avoid any jargon or inconvenience in their systems.

At the same time, P2P lendings also have some disadvantages, which are given below.

Risks of Peer-to-Peer Lending

Like any investment or loan, P2P lending carries risks that investors and borrowers should be aware of. Some of the risks are given below.

  1. Different companies have different rules and regulations. Many companies allow you to withdraw your money early in the process. But, sometimes, it could be tricky to withdraw your money early because some companies do not allow this.
  2. If a borrower pays back your money earlier or later than expected, then it can affect your profits also.

These types of risks you can face in Peer-to-Peer lending that is why it is important to understand the working of the whole process.
 

Which factors should we consider before involving in P2P lending?

Some of the key factors that we should consider are given below

  1. Your investment or financing goals and risk tolerance
  2. The creditworthiness and financial situation of borrowers
  3. The fees and interest rates charged by the platform
  4. The platform's reputation and track record
  5. The platform's security and regulatory compliance

Regulations and Legal Issues

P2P lending is subject to regulations and legal issues in different countries. One of the biggest challenges the P2P lending industry has to face is a consistent regulatory framework. Some of the advanced countries like the USA and UK have given a legal framework for this industry. Yet a lot to do to make it a worldwide industry.

 

Other big legal issues the P2P lending industry is facing are breaches of contract, fraud, and violations of laws. To avoid these issues, the P2P industry has introduced a strict screening process for borrowers and investors as well. As we all know that it is a growing industry and will stand out in the future.

Final Words:

In this article we have discussed the working of Peer-to-Peer lending. We have also found out the advantages and risks of P2P lending. Peer-to-Peer lending is an ever-growing industry, it has many benefits, but at the same time, it also has risks.

For a newcomer, it is better to start with a low budget and gradually increase it as he becomes more comfortable with the whole process of Peer-to-Peer lending. This industry is also facing some legal issues in developing countries, but the P2P lending industry will hopefully overcome these issues in the near future. 

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