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Understanding what P2P lending is and how it works

By Edited Jan 17, 2014 0 0

All you need to know about P2P lending sites

In the past, when someone wanted to get a personal loan, their only choice was to head down to the bank with, and try to convince the bank as why they need a loan. Of course, they had to prove their ability to repay the loan. Luckily, during the past couple of years, we have seen alternatives to these traditional loans in what has become known as P2P loans, peer to peer loans, or person to person loans as some others know it. In this article we will briefly explain to you what P2P lending is and give you a general understanding of how it works.

P2P loans were created thanks to Internet technology. One of the purposes of these P2P loan companies was to offer borrowers an alternative way to borrow money without going to a traditional bank. With P2P loans, the borrower will enjoy a much better interest rate than what a traditional bank would be able to offer, and the loan will be much less complicated to obtain. Everything is done from the borrowers computer, and when the loan is funded, the money is directly deposited in to the borrowers bank account.

The amount of money that someone can borrow will vary from one site to another. Your credit score is used to determine how much money you can borrow. Those with excellent credit scores can sometimes borrow up to $25,000. Others, who have had credit problems in the past, can also get a loan despite their past credit problems. When you apply for your loan, the Peer to Peer lending site will obtain your credit score and decide that what amount you are eligible to borrow. No collateral is required as long as you have a source of regular income. The lower your credit score is, the lower the amount you will be able to borrow. I have personally known someone who had a credit score of 642 and they were eligible to get a loan for $4000. They were very grateful to get their loan as they were not able to get a loan from any of the traditional banks out there. I have personally taken out three loans and have paid two of them off. I am currently paying off my third loan that I received which was a 10K loan. Payments are automatically withdrawn from my bank account every month. The interest rate that spmeone will pay is also determined by their credit score. The money that is being loaned to you is going to come from various sources of different people. These people are usually not companies, they are individuals who are lending out their personal money to you and others so that they can earn profitable returns on their money. In a sense, they are playing bank. Please note that even though those with poor credit scores can obtain P2P loans, many sites now have a minimum score that someone must have in order to get a loan. If your credit score is as terrible as can be, you will not be considered for any loan.

The first step for a borrower is to register as a borrower on the P2P lending website that they choose to use. You will then fill out some information about how much you want to borrow, the purpose of the loan, and a general guess on what your credit score is. This is to give the P2P loan company a general idea of what your interest rate will be. You will then fill out your general information about yourself and then give the site permission to retrieve your credit score. The application is really short and easy. Once you give permission to retrieve your credit score, they will let you know right away how much you are eligible to borrow. You will then fill out a description about why you need the loan and submit it. Lenders will then be able to see your loan request and can start lending you money. You will be astonished when you see the loans coming in. Lenders will not usually fund your entire loan, they will instead loan you $25 or $50. You must understand that they do not want to invest all of their money in to one person just in case that person defaults on their loan. As an example, let's say that you requested a 10K loan. Steve will loan you $25, Martha will loan you $25, George will loan you $50, Sabrina will loan you $200, Arthur will loan you $100 and so on. Different investors will loan you money until your loan amount is reached. Different P2P lending sites will have a different amount of time that your listing will remain active until it gets deleted.  Your goal will be to get your loan gets funded before that happens. It is really fun as you log in to your account day after day, and see the amount lent to you growing. One of the best advice I can give someone when applying for a P2P loan is to make sure that your loan description is really clear and lets the investors know what you intend to do with the money. Sometimes, the lenders will even ask you questions, and it is best to answer any questions that they throw your way. Not all P2P loan applications get funded, and it will really help you to write a descriptive listing.

Borrowers are not the only ones who benefit from P2P loans. Peer to Peer lending companies were also created to offer lenders and investors a way to earn money. Lenders earn a much better return on their money than if they toyed around with the measly interest rates that traditional banks offer them. For those who are looking to make some extra money by investing, P2P lending is certainly a great way to earn off of money that you may have just sitting around. This money may be earning you next to nothing in your bank account. Once registered as a lender, these P2P lending sites will show you the best practices to use when lending your money out. Some lenders play it safe and will only loan their money out to certain people who have a certain credit score and will not risk lending to those with low credit scores. Others love taking more of a risk and lending their money to those with lower credit scores. Why would they take such a risk? Because the borrowers with lower credit scores will be paying higher interest rates than those with good credit scores. The return on their money will be much greater, but of course the risk are higher.

I hope that this article has given you a general understanding of how P2P lending works and why someone may want to use Peer to Peer loan sites. There are a number of different P2P loan sites out there, and some only serve certain countries. Some of the more popular sites are Prosper Marketplace, Zopa, and the Lending Club. There are many more, and you may want to search around the Internet to inquire on which one you will want to use and what they can offer you.



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