Peer-to-peer (P2P) lending is a crowdsourced version of borrowing money. If you're a small, growing business with no particular history, borrowing from your peers can be a great alternative to borrowing from a bank.
This system aims to increase profits for lenders and reduce restrictions for borrowers by removing traditional intermediaries (bankers) from the system.
In essence, the system is almost identical to the traditional lending system, although the main players have changed slightly.
Benefits of P2P lending
Compare the peer-to-peer model to the classic banking model. Essentially the same thing happens; a group of people pools resources and others borrow from that pool. The differences are in the pool structure and the steps required.
Risks of P2P lending
Peer-to-peer lending has all the usual risks of borrowing and lending, but those risks are amplified. The reason the bank doesn't pay you much for your savings account is that all things considered, it's a fairly low-risk system.
Risks to borrowers
Borrowers will also learn that it's not the Wild West. You can't get money with a terrible FICO account, although there's more flexibility here. (Third parties manage all P2P loans, they're not banks.) So you can spend a lot of time preparing and finding the right platform, only to find out that no one is willing to take you on.
Peer-to-peer lending is not completely analogous, but it is like stock selection.
-Investing money in a bank is like investing in an index tracking account: you're going to make money, but you're not going to triple your cash overnight.
-P2P is a little more like investing in a single stock-you can make a lot more than in a tracker, but the risk is much higher.
Thanks for reading, and read more here about peer-to-peer lending.
