Do You Understand Peer to Peer Personal Loans?
People quote the old saying: “There is nothing new under the sun”, and this may be applied to peer to peer personal loans. In ancient times, before banks were around, money was lent from one individual to another. If someone needed money to build something or expand his business, he would approach someone who he knew had some money to spare. This was the basics of person to person, or peer to peer loan. Of course, as society grew more sophisticated, institutions were created with the specific purpose of lending money to people who needed it, earning a profit on that operation by charging interest on the funds lent. Most of these lending institutions got their money, in turn, from other people in the community who needed to have a place to put their money and earn interest. The financial institution acted as an “intermediary”, taking money from depositors and paying them interest at a given rate, then lending that money to borrowers at a higher rate. The difference between what they paid their depositors and what they got from their borrowers was their profit.
But many factors in the lending business have encouraged people to revisit the old concept of peer to peer personal loans, with the result that both lender and borrower can gain an advantage. Eliminating this middle man, or intermediary, is called disintermediation. The old concept of person to person personal loans, by necessity, had to be limited to borrowers and lenders in the same area, but today, via the used of online marketplaces for these types of loans, the lenders and borrowers can be anywhere in the country. Sometimes these online marketplaces opearate like auction sites and act as a conduit for the borrower to find the lender. Today’s consumer is very attunedto this concept due to marketplace sites such as Ebay, but instead of hard goods or e-goods, buyers and sellers are actually dealing in money for sale. Both parties have an advantage by eliminating the middle man.
Lenders especially like the concept of peer to peer personal loans due to the unique risk arrangement available. Lenders can divide the funds they lend (their investment) into many small personal loans to various individuals, which means that each individual may receive his money from a variety of lenders. Let us say that you would like to borrow $1,000 to purchase an engagement ring for your girlfriend. There may be someone on the peer to peer lending site who wants to lend $1,000. But what will happen is that the lender of $1,000 prefers to only lend $100 to you for your ring purchase. But he can easily find another borrower, someone who is using the funds for loan consolidation, and lend him another $100, then locate another borrower and lend him money for home repairs, etc, until he has lent his total a$1,000 investment. Get more info at wikipedia now.
In this way, the risk of the $1,000 lent is spread out over 10 different individuals, making the risk much lower for the lender, and therefore allowing him to keep his rate more reasonable, since interest rates are largely determined by the risk involved. The other side of the story is that the borrower has such a wide field of lenders that his chances are greatly increased of getting that personal loan in the first place.
This “old but new” solution of peer to peer personal loans is becoming a win-win situation for all the parties to the transaction. Don’t miss this kind of investment opportunities.
