to finance and start their businesses online. With banks
offering high interest in loans, credit investigations and
onerous amortization obligations, online communities raised
money and lend it to complete strangers. This is called Peer to
Peer lending or P2P.
Peer to Peer lending is a type of "social lending" wherein the
lender would bid money to finance a loan application from a
struggling entrepreneur from a different country or any
prospective person with reasonable need to acquire loans. These
loans are needed to start up a business, finance a significant
project or help a third world person to start at business and
become productive. Voluntary investors pool the funds, send it
to the online marketplace like http://Prosper.
Zopa or Kiva and delegate the collection process to a collecting
agency and charge them with rates lower than what banks offer
minus the administrative process.
Loans are divided among lenders and payments are sent directly
to the P2P sites which then distribute the money to lenders and
report non payments to credit agencies or collection firms.
Formal arrangement seems to make people more conscious about
repayment terms without any bank involved in the process.
It started when consumer's started to doubt financial
institutions capabilities of helping them alleviating from loan
payments with high interest rates and therefore, their ethics
was being questioned. The maverick online companies' attitude
toward this predicament is if they can get this done cheaper
between ourselves, what do we need a bank for?
There are two variations of Peer to Peer Lending on the
Internet, the first one is Online Marketplace model and Family
and Friend Model. The marketplace model of peer-to-peer lending
connects borrowers with lenders through an "auction process" in
which the lender who offering the lowest interest rates "wins"
the borrower's. Some loans are packaged and resell the loans but
ultimately, they are sold to different individuals.
The "family and friend" model lets go the auction process and
concentrates on lenders and borrowers who already have prior
knowledge of each other and formalize an online collaboration
and debt servicing. The advantage of the "market model" benefits
the borrower with its match-making aspect to the lender that
offers the lowest interest rate for loans. These loans are
unsecured and therefore, risky.
Lenders charge enough to cover defaults in payment and still
profit from the investments. There is also a strategy of
repayment which is shame. People who borrow repay real world
co-ops because they fear losing face among peers. Their
objective, therefore, is to make their small business profitable
and regularly repay the loans to conduit collection agencies.
The peer to peer lending process uses "social computing"
phenomena such as internet blogs, podcasts and participation
from online volunteers to match borrowers with prospective
lenders. Loans become cheaper as a result while lenders can earn
more from other investments. Many investors believed that they
get higher returns from 11-13% returns without much management
while borrowers get lower rates and less hassle.
About The Author: Thomas Winn is a freelance writer for many
small financial blogs. For more on peer-to-peer student loans,
please visit
http://blog.
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