Home
News
- 1 Peer-to-Peer lending eliminates the involvement of third parties in financial lending.
- 2 It is an online platform offering loans and credits without the involvement of traditional financial institutions i.e. banks.
Peer-to-Peer (P2P) lending is lending money without implication of financial organization. It is an online platform where buyers and lenders are assimilated or linked. The loan listings are created here and the investors decide to fund it. The investors can be individuals or institutions.
P2P serves as a lending platform that is using the technology to ease and improve the user’s experience. It sanctions the loans and these loans may be used for a variety of things including debt consolidation, school loans or personal loans, etc. This online lending platform runs by following the legal restriction imposed by the country.
Types of Peer-to-Peer Lending
There are two types of lending namely: secured and unsecured lending.
Secured Lending: This type of lending is backed by assets. These include physical assets like houses, cars, etc., and digital assets like any cryptocurrency. These are called collaterals. It clearly means that if the borrower defaults, the lender can size and sell the collateral to recover the funds.
Unsecured Lending: This lending is not backed by any collateral. The lending amount is given on the basis of the creditworthiness of the borrower. The financial background of the borrower is checked before facilitating. In case of default, lenders opt for legal procedures for recovery.
Becoming a Peer-to-Peer investor is easy. For this, registration with the platform is a must. This requires some easy steps to be implemented. Later the investor can choose the categories or the criteria for loan availability.
P2P as a Passive Source of Income
It can yield a good passive income in many ways. Regular interest can be earned especially if the lender has a diversified loan portfolio. However, the amount of interest earned depends on the loan amount, interest rate, and even the time taken to repay it.
The portfolio is managed by the platform and there is no requirement of the lender to maintain the same. Automated investments are also made by the platform. The lender does not have to define the category or need for loan verification. The platform seldom checks the borrower’s financial background before dispatching the amount.
The lenders can also increase their passive income by reinvesting repayments. The platform collects and manages the interest amount to lenders. With this interest amount, the lenders can reinvest it in more loans of different categories. In this way, they can earn more and will get interest from other loan amounts too.
Peer-to-Peer lending has some risks attached to it. This includes default risks, credit risks, platform risks, lack of collateral, and market risks. If the borrower defaults, then there is a risk of gaining the amount back.
Another risk attached with it is once the amount is credited, it is not sure that it will be returned with interest timely. There are no physical goods backed hence there is a risk, and the financial market risk is always there which decides the interest rate.
Besides, there are some rewards like higher returns, passive income, transparency, control, diversification, and access to the credit market. Usually, the interest rate is high which gives good repayments. There are lots of loan categories with different interest rates like education loans, personal loans, etc.
Summary
Peer-to-Peer lending has lots of rewards and risks associated with it. It can be a good source of passive income as well. These lending platforms are bound legally which means it follows the legal regulations of the country. Before investing, thorough research of the platform should be done.
With a background in journalism, Ritika Sharma has worked with many reputed media firms focusing on general news such as politics and crime. She joined The Coin Republic as a reporter for crypto, and found a great passion for cryptocurrency, Web3, NFTs and other digital assets. She spends a lot of time researching and delving deeper into these concepts around the clock, and is a strong advocate for women in STEM.
