Do You Understand Peer To Peer Personal Loans?
Posted March 6, 2010 – 9:47 am in: UncategorizedThey say what goes around comes around, and this couldn’t be more true when it comes to peer to peer personal loans. Eons ago, before the development of formal trade and commerce, there existed no banks or other lending institutions. People who needed funds could usually find the person in their region who had excess funds to lend out. This was the original person to person, or peer to peer loan. Of course, as society became more sophisticated, institutions were created with the specific purpose of lending money to people who needed it, earning a profit on that operation by charging interest on the funds lent. Many times, these businesses were formed as savings and loans, so that they would receive savings deposits from individuals who wanted to receive a return on money they were not using. In turn, these funds would be employed to fund the loans to other individuals who were in need of money, in what would now be considered a personal loan. And, of course, they got to keep the difference as their profit.
Today, an old but new phenomenon has resurfaced, where holders of deposit funds are finding it more attractive and profitable to make personal loans directly to the people who need them. Cutting out this middle man, or intermediary, is a process known as disintermediation. Peer to peer loans work 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. Sometimes these online marketplaces work like auction sites and act as a connection for the borrower to find the lender. Today’s consumer is very usedto this concept due to marketplace sites such as Ebay, but instead of hard goods or e-goods, buyers and sellers are actually dealing in money for sale. Both parties gain an advantage by eliminating the financial institution.
One of the greatest advantages of peer to peer personal loans is how they change the risk scenario for lenders. A lender may structure his investment so that only a small portion of his total investment is lent as a personal loan to each individual borrower. Imagine that you, as a borrower, wanted to get a personal loan of $1,000 for an engagement ring. There may be someone on the peer to peer lending site who wants to lend $1,000. But what will happen is that the lender of $1,000 will only lend $100 to you for your dream purchase. But he can easily locate 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.
This $1,000 investment is, in this manner, going to be spread out over ten different risks, so that his total risk is much lower than it would otherwise have been. The other side of the coin is that the borrower has such a wide field of lenders that his chances are greatly increased of getting that personal loan in the first place.
That this idea of direct personal loans from one person to another has been reborn is nosurprise, since parties on both sides of the transaction benefit greatly.
More information about peer to peer lending at engagement ring financing or maybe a loan for personal loans
