P2P Lending

P2P (Person-to-person) lending is a certain breed of financial transaction (primarily lending and borrowing, though other more complicated transactions can be facilitated) which occurs directly between individuals or "peers" without the intermediation of a traditional financial institution. Person-to-person lending is for the most part a for-profit activity, this distinguishes it from person-to-person charities, person-to-person philanthropy and crowdfunding which also create connections between donors and recipients of donations but are nonprofit movements.

Rather than go through an institution, like a bank, a loan can be had through a P2P lending site where investors can pool together resources to fund a borrower’s loan proposal. These sites help connect people who want to borrow money to those who have a little extra money to lend.

For borrowers, the process gets underway after filling out some information. Borrowers have their credit checked, and they state how much money they want, and why they want it. Borrowers can get money for a number of purposes, from debt consolidation to business start-up to car purchase. Some even use P2P lending to pay for school. Lenders can then decide how much they want to lend to the borrower. Once the the loan is fully funded, the money is disbursed to the borrower, and he or she starts making payments on a schedule. Most loans are three-year loans, but some P2P lenders are beginning to introduce five-year loans.

As one might expect, there are fees that need to be paid, as well as interest charges. As with more traditional loans, your credit score does make a difference in your interest rate. One of the nice things about using a peer to peer lending site is that interest, fees and other expenses are figured and collected for you. Additionally, borrowers only need to make payments to one place (the P2P site), the site makes through that payments plus interest are made to the lenders.

For lenders, it is fairly straightforward. It is possible to lend money in US$25 increments, choosing which borrowers they want to invest in. If a lender wants the chance of a higher return, he or she can provide funds to someone with riskier credit. Of course, this increases the chances that the lender may not be repaid; peer to peer lending represents risks to lenders, since the borrower can default.

(Reference to Free from Broke and Wikipeida)