With the evolution of institutions providing funds today, many people, especially those seeking funds for startups have benefited from the projects. Peer-to-peer lending is one of the major mainstreams that has existed for several years. P2P lending happens online, and borrowers can easily get loans from investors. In the marketplace, the borrower signs up and lists down their requirements, and the investor checks if the person applying for the loan has met the qualifications.
P2P lending is different from traditional funding. Unlike the traditional funding that basically relies on assets accumulated to get the loan, P2P lending uses a debt-based formula where the borrower is given the loan and expected to pay within the agreed period, usually 1 to 5 years. There are numerous P2P lending platforms like PeerBerry, Mintos, Twino, Viainvest, among others. Before applying for a loan, it becomes vital to check P2P lending platform reviews to know how they work, the interest rates, and the eligibility criteria. With that said, let’s dive into the benefits and pitfalls of P2P lending.
The Advantages of P2P Lending for Borrowers
Simple Process of Application
Peep-to-peer lending is way better than bank loans comparing the application process. Taking a loan from a bank involves a lot of paperwork. However, with P2P platforms, the process is streamlined. The borrower only needs to sign up and describing why they need the loan. The lenders review the requests then provide the loans once eligibility is met. It is also easy to check the interest rates on various platforms to know how much one will need to repay. Many platforms in the market will ask for information like;
- Purpose of taking the loan
- The range of income
- Personal information
- Credit score
- Amount of loan.
If you are applying for a business loan, you will be required to add more details about your business such as;
- Tax returns
- Balance sheets
- Loss statements
Lower Interest Rates
Another great advantage of P2P lending is the low interest rates the platforms offer to borrowers. There are various ways of determining the interest rates;
- The marketplace sets the rates according to requirement specifications. There are various parameters like, loan repayment period, credit score, which will affect the rates.
- The borrower can decide the rate they want, and the investor evaluates it and estimates if they would like to invest in the loan.
- Versatile rates depending on the level of demand and supply
These marketplaces will display the interest rates immediately after the borrower signs up. Compared to traditional funding institutions, P2P lending offers much lower interest rates.
No Security Required
Even though offering unsecured loans is a disadvantage to lenders, it is the greatest advantage to borrowers. However, not all platforms provide loans without any collateral. For those that lend the money without collateral, there are several parameters that they must check to ensure the borrower is qualified and capable of repaying the loan. Parameters such as credit score and business cash flow often determine the eligibility of the borrower.
The fact that there will be no tie with personal properties also makes the application process quick and simple. Additionally, P2P loans are more versatile compared to other loans. For instance, you can make an overpayment if you have sufficient money or change your repayment dates depending on your current financial situation.
Access to Funds Quickly
P2P lending marketplaces are online and this makes the process of application quick and convenient, especially if you want quick funds. There is always a list of investors ready to lend the money. So, the turnaround time is always faster. It can take a day or even hours to get the loan.
The Drawbacks of P2P Lending
Even though P2P lending is a great alternative, there are several drawbacks that people applying for the loans may experience. Let’s look at them closely.
The Credit Score Must be Good to Secure the Loan
Even if P2P lending eliminates the numerous demands of traditional loans, the borrower must still pass the credit score check to get the loan. This proves that they are capable of repaying the loan, and it is a safe way of protecting the investors’ funds. So, if a person intends to apply for a loan, it will be a great idea to improve the credit score first.
There Might be an Application Fee
Peer-to-peer loans usually come with an application fee. This is all about matching the lenders with suitable investors. The fee also acts as a security to investors from loan defaulters. In most cases, the fee one pays depends on the amount of loan they want, their credit score, and the repayment period.
The Bottom Line
These are the benefits and drawbacks of peer-to-peer lending that give a borrower a picture of how such loans could benefit them. With the numerous P2P platforms, it becomes crucial to take time and read the reviews to know the best choice. Each platform has specific requirements and a borrower must confirm if they can meet them before applying.