As much as this old world of ours changes, there are some concepts that work so well they keep returning, and peer to peer personal loans may be one of them. Eons ago, before the development of formal trade and commerce, there were no banks or other lending institutions. People who needed funds could usually find the person in the area who had excess funds to lend out. This comprised the original person to person, or peer to peer loan. Trade and commerce developed, and specialization became more common, with the result that certain businesses were set up solely for the purpose of lending money, at a profit. Many times, these businesses were formed as savings and loans, so that they would receive savings deposits of individuals who wanted to receive a return on money they were not using. Banks or other financial institutions took advantage of this by using the deposited funds and lending it to people who needed funds. The lending institutions made money paying interest on deposits at a lower rate than the interest they earned on loan.
The cycle has turned, and many people are now looking to peer to peer personal loans, which eliminate this middle entity, making the transaction less expensive for both parties. Since the “intermediary” of a bank is eliminated, some people refer to this process as disintermediation. Today’s peer to peer personal loans are not limited to those in the same locale, since they can be administered on an online marketplace, where people in need of funds can be matched with those who are willing to lend. Many times, these sites may take the form of auctions, where the lender can compete with other lenders for the borrowers they want. 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 really dealing in money for sale. Both parties have an advantage by eliminating the middle man.
Another important feature of peer to peer personal loans is the mannaer in which the risk of these loans is managed. Frequently, personal loans are parcelled so that a lender gives his money to a number of different borrowers and, conversely, the borrower is receiving his loan from many different lenders. Let us say that you want to borrow $1,000 to purchase an engagement ring for your girlfriend. Many investors on the peer to peer lending site may have $1,000 they are willing to invest. But what will happen is that the lender of $1,000 prefers to only lend $100 to you for your dream purchase. But he can easily find another borrower, someone who is using the funds for loan consolidation, and lend him another $100, then find another borrower and lend him money for home repairs, etc, until he has lent his total a$1,000 investment.
In this way, the risk of the $1,000 lent is spread out over 10 different different borrowers, making the risk much lower for the lender, and therefore allowing him to keep his rate more reasonable, since interest rates are primarily determined by the risk involved. The other side of the story is that the borrower has such a wide array of lenders that his chances are greatly increased of getting that personal loan in the first place.
When an idea has a sound foundation, it is no surprise that it resurfaces as society faces new challenges, and this is precisely what has happened with peer to peer personal loans.
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categories: investment,loans,peer to peer lending,online investing
