Peer to Peer lending is a platform where borrowers and lenders come together. Except the lenders aren't banks. They're regular people, just like me and you. You can be on either side, and your neighbor could be on the other!
These platforms basically check the credit and credit worthiness of the individuals who want to borrow. They place a credit grade towards each individual, and assign an interest rate to each person to determine what they're going to pay to the lenders.
Whether you're a borrower or a lender, there are benefits to using peer to peer lending.
This all came about right before the economic crash in 2008. Back in 2006, we saw a company called Prosper come on the scene, and they were one of the first to enter into the Peer to Peer lending space. Not soon after, they had to stop business as they didn't have the correct securities licenses to be selling these notes throughout the country.
They went dark for a period of time to sort out their legality issues, and meanwhile another company called Lending Club joined the party. They got the appropriate licenses and were able to start loaning money out to people in a very unique way.
Unlike a traditional loan, where one person loans the full amount to another, Peer to Peer Lending diversifies your risk by spreading your investment across multiple borrowers.
For example, say a local restaurant owner needed a $10,000 loan to install plexiglass in their restaurant. Except they don't want to go to the bank - maybe they want to borrow through an intermediary or help out a neighbor. All of their neighbors get together and 400 of them loan him $25 each. That is much less risk for each lender, then if just one neighbor gave him the whole $10,000.
If your the lender, you have less risk then even the bank would. In addition, on the borrowers side, the amount you pay monthly gets spread out between all of the people who have loaned money to that individual. Now, if the borrower were to lose their business and not be able to pay back the loan - your eggs aren't all in one basket.
A common question raised is if the loans via Peer to Peer Lending are secured. Most of the time the answer is no, they are usually unsecured, however thanks to the diversification - the risk is extremely low.
Peer to peer lending really disrupted the industry. You'd think during an economic crash would have been the worst time to open up a lending company. However, Lending Club did it, and they did is successfully. They even kept growing and went public during the recession.
Other companies have now joined the peer to peer lending space, and while it is becoming more mainstream, it is still a major disrupter to the financial industry. Not all states allow peer to peer lending for some reason or another, but in those that do, it is a viable alternative investment.
In order to utilize it successfully, you just need to know what you're doing. Do your research, and have a system for investing that makes your investments safer.
We have guided thousands of investors on their path to Financial Freedom and almost all of them utilize Peer to Peer Lending to kick start their plan. One of our expert Wealth Coaches can walk you through this process, step by step. Get a free personalized plan by booking a no obligation Strategy Session today.
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