Peer-to-peer lending: crowdsourcing loans and credit
Curious about peer to peer lending? Read about how it works, who’s involved, and why it’s growing. We’ll go over a basic overview of this model of money lending. We’ll also look at two well-known services that facilitate peer to peer lending, Prosper Marketplace and Lending Club.
What is peer to peer lending?
Peer to peer lending, sometimes abbreviated as p2p lending or called crowdfunding, is a model of connecting lenders who have money to invest with borrowers who need cash. In a traditional loan, the bank takes on the role of go-between for the people who are investing (by placing their money in the bank) and the people who are taking out a loan. With peer to peer lending, the lender and borrower deal directly with one another instead of with the bank. Peer to peer lending is a recent development coinciding with modern fintech and microloans.
What does a peer to peer lending service do?
Peer to peer lending services, unlike banks, do not serve as middleman in a transaction. Rather, they facilitate successful partnerships by: giving visibility to potential borrowers and lenders, helping both parties comply with legal requirements, working with lenders to collect payments on loans, checking the validity of potential borrowers, and providing other services.
What does peer to peer lending offer?
According to an article in The Economist, the realm of peer to peer lending is expanding. One reason for this, the article suggests, is the way peer to peer lending continues to function in a tough economy even as banks begin to struggle. Because banks do not share their losses with the people who have given them money for safekeeping, they lose stability when borrowers cannot repay their loans. Lenders involved in peer to peer lending, however, invest with the understanding that doing so is a risk. Thus, economic problems hurt the traditional lending model acutely while leaving the peer to peer lending model relatively unharmed.
Lending service profiles: Prosper Marketplace and Lending Club
Prosper Marketplace and Lending Club are two significant peer to peer lending services. Prosper was the first American peer to peer lending service. Lending Club has international status as the largest peer to peer lending service. Both lending services work with lenders to determine potential borrowers’ reliability through identity checks, assessments of debt and credit score, and the like. For Prosper, this leads to assigning each borrower a “Prosper Rating” which combines a credit score from an external reporter and a score generated within Prosper. Lending Club, similarly, creates a credit grade that affects how much a borrower pays in interest. Both companies operate by making money from origination fees (paid when a borrower begins using the lending service) and service fees.
Where does peer to peer lending fit in?
When peer to peer lending was first gaining popularity, lending services often emphasized the social aspect of their model. By connecting people with common interests or ties, lending services tried to build and use social networks to encourage lending and repayment. Peer to peer lending now relies less on the social connection between lenders and borrowers as it increasingly moves into the mainstream financial world alongside traditional lending models