What are peer to peer lending Advantages and disadvantages?

 Peer to peer lending is a type of direct lending of funds to consumers and small businesses without the participation of an intermediary in the process. Generally, p2p lending is done using an online platform which matches borrowers with lenders. This type of alternative finance offers some great benefits to both lenders and borrowers.

Advantages

  1. High returns for investors: p2p platform typically offers high returns to investors compared to other types of investments. 

  2. An accessible source of funding: this alternative platform is more affordable for some borrowers compared to traditional loan providing financial institutions. The reason could be the low credit score of the borrower or a particular loan purpose.

  3. Low interest rate for borrowers: because of intense competition, these peer to peer loans have a low-interest rate and origination fee.

While, peer to peer lending has its benefits, there are a few drawbacks to this as well:

  1. No Government protection or insurance: peer to peer platforms have no protection provided by the government. Nor there is any other type of guarantee in case of default borrowers. 

  2. Risk: p2p loans have high credit risk, since most applying borrowers have low credit score and have been unable to get a loan from the bank. Hence, being a lender, you have to be vigilant of the default probability of the borrower. 

  3. Legislation: p2p lending might not be provided to some lenders or borrowers because some jurisdictions don’t allow it or need the platforms that provide this service to comply with the investment regulations. 

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