In 2005 when the global economic crisis hit, people were finding it very hard to get credit from the bank or most financial institutions. This lead to a new form of lending called peer loans, or social lending.
What reason people have for getting a loan vary. Some people would like to pay for a wedding, a new car, university tuition, hospital bills or make some home improvements. They may also want to consolidate some of the debts they already have. The list is endless but people are finding it harder to get credit nowadays so peer loans can offer an alternative to traditional lending.
The way a peer to peer loan works is that borrowers and lenders use tools on a peer loans website to complete financial transactions among themselves at a rate that both parties are happy with.
The borrower posts on the website how much they would like to borrow, what they need the money for and the rate they are willing to pay for the loan. They then get their friends in the network to view the listing.
The investor/lender then gets an invitation to view the listing, assesses the proposition and makes a decision whether to invest or not.
Once the loan is fulfilled, the peer loans company compiles the promissory note and gives it to all involved parties. The company will also deal with on-going notifications and provides access to online payment systems to ensure a smooth repayment process. The promissory note is an important document which is a written promise that the borrower will pay the lender the money owed. This note also contains the specifics that the borrower and lender had agreed upon such as the total loan amount, the repayment time frame, how much the interest rate will be, the monthly payment cost. All parties involved will sign the document to ensure it is a legal instrument.
Peer-to-Peer Lending is a fairer alternative to a bank loan as the interest rates are lower for the borrower than they would be from a bank for example but there is a higher return for lenders compared to having money in a savings account, so everyone benefits
Peer loans work well because of disintermediation. The overheads are much lower when compared to the more commonly used financial institutions. These have to pay many employees, property expenses as well as running costs.
A further benefit is that due to the lack of administrative procedures involved with peer loans, the time needed to complete a loan application and the money transfer takes much less time than traditional loans, which means the borrowers and lender can get to the money they want in a much more timely way.