Although there is no doubt that traditional financial vehicles such as loans can provide us with a substantial amount of cash, there are other possibilities to consider. One option which has featured prominently in recent timers is an alternative called peer-to-peer lending. Often abbreviated as P2P lending, this is a unique method that is associated with advantages as well as a few potential risks. Let’s take a quick look at this concept in more detail before examining these pros and cons.
What is Peer-to-Peer Lending?
The basic principle behind the majority of P2P lending services is to take the proverbial middleman out of the equation. Online third-party firms will essentially pair lenders with with borrowers for a small fee. The main benefit is that they are generally based within the Internet community, their overhead is much lower. S a result, the commissions that they charge tends to be much more agreeable when compared to traditional services. Now, let us take a look at the finer points to this type of lending process.
The Main Benefits
Most experts point out that the primary advantage of P2P services is the fact that the borrower will be subject to much lower interest rates when compared to those provided by a bank or a normal lender. P2P lenders also tend to be less strict in terms of the borrowing qualifications, so those who are unable to borrow money from a bank will often opt for this alternative. Finally, the limits that can be borrowed are flexible and the payment periods will often come with a specific grace period. We should still note that all of these observations will primarily depend upon the lending firm.
Are There Risks?
One of the issues that has been seen in recent times involves the credit rating of the borrower. As those with poor ratings are more likely to use the service, the chances that they will default on a future payment can rise. Another problem that some have encountered involves regulations. Some P2P firms are located within countries that do not require them to supply transparent financial details. So, the term “buyer beware” certainly comes into play here.
Not only are default rates higher when compared to traditional banks, but there is a final concern to address. Let’s assume for a moment that you require a certain amount of money and you have recently been turned down by your bank. You speak with a P2P lending service and they approve your application. In some cases, they will charge you predominantly higher interest rates simply because they appreciate that you have few additional options. In the long run, this could cost you even more money than was initially request. On a final note, we should point out that the terms and conditions associated with this type of loan can be quite strict. If you happen to miss a payment, the penalties could be severe in terms of damage to your credit rating.
Putting it All Together
P2p lending services can be powerful tools to consider. Like any type of financial opportunity, it is important to do your research ahead of time. Take look at the reputation of the company, their track record and their regulations. Due to the fact that many crowdfunding campaigns currently use this service, it is indeed worth a closer look. However, always be careful and perform due diligence before signing any type of contractual obligation. Knowing what to look for in advance will be able to save you potential financial hardship in the future and once again, you can always refer back to this article for guidance.