Peer to Peer lending (or P2P lending) is one of the most innovative financial products of recent times. It enables creditworthy borrowers lower their cost of loans and individual lenders/investors to lend directly to their peers and community thereby earning higher returns. P2P lending is also known as social lending or crowd lending. With peer-to-peer lending, borrowers take loans from individual investors who are willing to lend their own money for an agreed interest rate. The profile of a borrower is usually displayed on a peer-to-peer platform where investors can assess these profiles to determine whether they would want to risk lending money to a borrower. A borrower might receive the full loan amount or only a portion of what he asked for from an investor.
In the case of the latter, the remaining portion of the loan may be funded by one or more investors in the peer lending marketplace. In peer-to-peer lending, a loan may have multiple sources and monthly repayment has to be made to each of the individual sources. P2P platforms connect borrowers to investors with attractive interest rates. For lenders, the loans generate income in the form of interest which can often exceed the interest amount that can be earned through savings vehicles, such as saving accounts and CDs. In addition, an investor is able to earn a higher return on his/her investment than he/she can get from the stock market through the interest payments he/she receives monthly from the borrower. On the other hand, P2P loans give borrowers access to financing that they may not have gotten approval for from standard financial intermediaries. Furthermore, a borrower gets a more favourable interest rate on his/her loan than one he/she would otherwise have gotten from a bank. Peer-to-peer lending is a form of crowdfunding that offers personal unsecured loans to individuals and small businesses looking to take out student loans, commercial and real estate loans, payday loans, etc.
Since investment in a peer loan is not secured by any government guarantee, lenders have the option of choosing who to give funds to and have the advantage of diversifying their available funds among different borrowers. Extending crowdsourcing to unfamiliar lenders and borrowers opens up new opportunities.