Question

Explain Peer-to-Peer lending:

How it changes the way loans are made compared to the lending approaches of traditional financial institutions (i.e. banks, financing companies, credit card etc.)

What are the differences and similarities of loans made from P2P and from other traditional institutions?

What improvement it brings to the delivery of financial service?

Answer 1

P2P loans are loans that individuals and investors make—as opposed to loans that you obtain from your bank. People with extra money offer to lend that money to individuals and businesses through online services. A P2P service (typically a website) is a central marketplace matching lenders and borrowers, making the process relatively easy for everybody involved.

Peer-to-peer lending is a fairly straightforward process. All the transactions are carried out through a specialized online platform. The steps below describe the general P2P lending process:

1. A potential borrower interested in obtaining a loan completes an online application on the peer-to-peer lending platform.
2. The platform assesses the application and determines the risk and credit rating of the applicant. Then, the applicant is assigned with the appropriate interest rate.
3. When the application is approved, the applicant receives the available options from the investors based on his credit rating and assigned interest rates.
4. The applicant can evaluate the suggested options and choose one of them.
5. The applicant is responsible for paying periodic (usually monthly) interest payments and repaying the principal amount at maturity.

The company that maintains the online platform charges a fee for both borrowers and investors for the provided services.