Home  Investments Do You Understand Peer To Peer Personal Loans?
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Do You Understand Peer To Peer Personal Loans? |
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Written by StephanieS.Keenan
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Sunday, 07 March 2010 |
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There is an old saying: "There is nothing new under the sun", and this may be applied to peer to peer personal loans. In bygone days, banks and other lending institutions did not even exist. People who were in the need of funds could usually find the person in the area who had excess funds to lend out. It may not have been called it at that moment, but this was the origin of peer to peer loans. Of course, as society grew more sophisticated, institutions were created with the specific purpose of lending money to people who needed it, earning a profit on that operation by charging interest on the funds lent. Most of these lending institutions got their funds, in turn, from other people in the community who wanted to have a place to put their money and earn interest. Banks or other financial institutions took advantage of this by using the deposited funds and lending it to people who needed funds. The lending institutions made money paying interest on deposits at a lower rate than the interest they received on loan.
by StephanieS.Keenan
People quote the old saying: "There is nothing new under the sun", and this can be applied to peer to peer personal loans. Eons ago, before the development of formal trade and commerce, there were no banks or other lending institutions. People who needed funds could usually find the person in the area who had excess funds to lend out. It may not have been called it at that moment, but this was the origin of peer to peer loans. Of course, as society grew more sophisticated, institutions were created with the specific purpose of lending money to people who needed it, earning a profit on that operation by charging interest on the funds lent. Frequently, these businesses did not use their own funds, but took deposits from people in the area who wanted to earn some return on their excess cash. The financial institution acted as an "intermediary", taking funds from depositors and paying them interest at a certain rate, then lending that money to borrowers at a higher rate. The difference between what they paid their depositors and what they got from their borrowers was their profit.
Today, an old but new phenomenon has come back, where holders of deposit funds are finding it more attractive and lucrative to make personal loans directly to the people who need them. Since the "intermediary" of a bank is now gone, some people refer to this concept as disintermediation. Today's peer to peer personal loans are not limited to people in the same locale, since they can be administered on an online marketplace, where people in need of funds can be matched with those who are willing to lend. Sometimes these online marketplaces opearate like auction sites and act as a connection for the borrower to find the lender. The site connects the lenders and the borrowers in an auction process, similar to Ebay for goods, where the lenders compete with each other to provide the lowest rate to borrowers, and borrowers compete with each other to obtain the best rate for their personal loans. When the banks are taken out of the picture, so is their profit, and that difference is divided into savings for the borrower, and increased profit for the lender.
One of the greatest advantages of peer to peer personal loans is how they change the risk scenario for lenders. A lender may structure his investment so that only a small portion of his total investment is given as a personal loan to each individual borrower. Imagine that you, as a borrower, wanted to get a personal loan of $1,000 for an engagement ring. There may be someone on the peer to peer lending site who wants to lend $1,000. To limit his risk, however, this lender may only lend $100 for this purchase. He will look for someone else, who is perhaps planning to use his personal loan to consolidate overall debt and lend him $100, and then find someone else who plans on needed repairs to his home and lend him $100, and so on.
This $1,000 investment is, in this manner, going to be spread out over ten different risks, so that the overall risk is much lower than it would otherwise have been. The converse benefit for the borrowers is that they have many more lenders bidding for their personal loan business.
That this idea of direct personal loans from one person to another has been reborn should not be asurprise, since parties on both sides of the transaction benefit greatly.
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