It is said that goes around comes around, and this couldn’t be truer when it comes to peer to peer personal loans. In ancient history, before banks were invented, money was lent from one individual to another. People who were in the need of funds could usually find the person in the area who had excess funds to lend out. This is the core of person to person, or peer to peer lending, at its most basic. As our society and its institutions became increasingly formalized, specific businesses were set up for the main purpose of lending funds in exchange for the payment of interest. Most of these lending institutions got their funds, in turn, from other people in the community who needed to have a place to put their money and earn interest. The financial institution acted as an “intermediary”, taking funds from depositors and paying them interest at a given rate, then lending that money to borrowers at a higher rate. The lending establishments made money paying interest on deposits at a lower rate than the interest they received on loan.
The cycle has turned, and many people are now turning to peer to peer personal loans, which eliminate this middle man, making the transaction less expensive for both parties. Since the “intermediary” of a bank is now gone, some people refer to this concept as disintermediation. Peer to peer loans are successful because they are traded on a marketplace, where individuals who have money they want to invest can be in touch with individuals who need to borrow money. Many times, these sites may be in the form of auctions, where the lender can compete with other lenders for the borrowers they prefer to lend to. The process can be similar to the process used on Ebay for hardgoods or electronic goods, where the most desirable and in demand goods will be bid up in price; the most attractive borrowers in terms of credit rating will have better choice of terms and lenders for their personal loans. When the banks are taken out of the picture, so is their profit, and that difference is divided into savings for the borrower, and increased profit for the lender.
Lenders especially like the notion of peer to peer personal loans due to the unique risk arrangement available. Frequently, personal loans are parcelled so that a lender lends 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 would like to borrow $1,000 to purchase an engagement ring for your girlfriend. There may be someone on the peer to peer lending site who is looking to lend $1,000. 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.
Now this investment of $1,000 has been lent to 10 different people, lowering his overall risk, since the chances of all of his borrowers defaulting no their personal loans is very small. Borrowers, in this situation, have an advantage since they will have that many more lenders bidding for their personal loan.
That this concept of direct personal loans from one person to another has been reborn should not be asurprise, since parties on both sides of the transaction benefit greatly.
More information about peer to peer lending at personal loans other portfolio plans at personal loans
categories: investment,loans,peer to peer lending,online investing