The Real World of a Peer to Peer Loan
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The real truth about today’s lending environment is not good. It is difficult for even the most highly qualified individuals to get loans from large banks. A new innovation has surfaced called a peer to peer loan (or P2P loan) and it is catching on quickly. It is a way for average Americans to help average Americans. It lets borrowers bypass a bank or other lending institution and go directly to a reliable source for money. It helps lenders realize a profit on their investments in a fairly risk free manner. Ordinary investors basically become bankers and take on similar risks and rewards.
To start the P2P process, a borrower simply fills out a loan application. Then an individual lender bids to fund the loan. In the funding process, the lender looks closely at the credit risk involved and other associated factors and decides if he wants to loan the money requested. There will be many loan applications to look at and the lender can decide on the ones he is interested in funding. There are usually several investors funding one loan. Once there are enough lenders to fund the loan, the borrower is notified that the money is available and portions of the loan are sold to the lenders. A lender can buy into a loan for a very small amount of money, so most lenders diversity and spread their risk over several loans. All P2P lending companies use similar principals.
Peer to peer lending is beneficial to all parties involved. For borrowers, the rate they pay for the loan is usually lower than what they would pay at a bank. This is because there are fewer associated costs involved with processing a P2P loan. For lenders, the rate of return on a P2P loan is often higher than what they would get if they invested the money in a CD. Rates do vary but average between 9-12%. And, the lending company itself realizes a small profit from each loan it manages. A peer to peer loan has become part of the “real world” today and is helping to boost the economy by putting money back into the system.
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