How Does Peer-To-Peer Lending Work?

Traditionally, if you wanted to borrow money, you had to visit the bank to approve you for a loan. Nowadays, that approach will not work for everyone, and there is the possibility that the bank will turn you down for financing.


Luckily, there are numerous ways to borrow money or financing options that does not require working with a traditional lender.


Peer-to-peer (P2P) lending eliminates the middle person, allowing borrowers to obtain loans directly from lenders. This type of social lending aims to make financing and investing more accessible to this type of business model has been proven successful for millions of borrowers and investors. 


What’s Peer-to-peer (P2P) Lending?

Peer-to-peer (P2P) lending is an alternative method for borrowers to obtain financing. The idea behind P2P lending is to provide borrowers with funding from individual investors rather than financial institutions. In turn, the investors collect a certain percentage of interest fees that a borrower would typically pay to a bank.


By eliminating the middleman, the P2P lending model allows investors to receive a higher return on their investment. However, they will need to assume the risk of lending money to an individual or business that may not repay them on time.


How Peer-to-peer Lending Works?

Advanced technology is use to create a P2P platform to manage the borrowing and lending process and the process flow differs depending on whether you are looking for a loan or hoping to make profitable lending.


How Does the Borrowing Process Work?

P2P lending is similar to applying for a personal loan or other financing. This is how the procedure usually works:


(a) The application – The platform you selected will almost certainly need you to complete an application form. You will be ask for information such as name, address, date of birth, and other personal details.


(b) Risk evaluation – The platform will then assess your risk as a borrower with artificial intelligence (AI). Your credit report, credit score, job history, education, income, and other details may be analyse to determine whether your are eligible for lending.


(c) Finding a suitable investor – If you are qualified, the platform will present few loan options from different investors to you. You can look over the offers, review the terms, and decide which loans are a good fit for your situation.


Remember that you may have to pay additional fees to the platform as these fees may be in addition to the interest rates by the lender.


How Does the Lending Process Work?

P2P lending platform also allows investor to provide lending. Here is what the process might look to you as a potential investor:


(a) Determine eligibility – In order to invest through a P2P platform, you have to meet certain requirements. To participate, you might need to live in a specific state or have a certain net worth and income. Some P2P platforms only accept accredited investors.


(b) Establish and fund your account – If you are eligible to invest, the next step is to open an account. After that, you can deposit funds and begin reviewing applications from potential borrowers.


(c) Determine where to invest – Every platform is different, but most P2P will let you review applicants’ risk profiles and funding requests. You may opt to fund partial or full amount depending on your risk tolerance. 


(d) Keep track of your investment – You can track the returns after you invested to various borrowers. As borrowers repay their loans, you will be reimbursed for the funds you loaned out as well as the interest earned. Any investor fees charged by the P2P will likely be added on top.