Pros and Cons of Peer to Peer Lending

Peer-to-Peer Lending- Is it Right for You?The state of the economy causes people to seek new loan options that they never would have considered in the past.  Peer to peer lending is attractive to both borrowers and lenders.  Facilitators offer many perks to make the lending process easier, including automatic payments and online filing.



Who Uses Peer-to-Peer Lending?

Many members of the same families have used peer to peer lending to lend and borrow money from each other.  Borrowing money may appear to be a simple transaction at first, but it can quickly become a nightmare.  Facilitators who are experienced with peer-to-peer lending will help with taxes and work to keep the loan separate from the family relationship.  Although family loans are common, any peer-to-peer loan transaction can occur without any previous relationship between the parties.

Peer-to-peer facilitators ensure that the loan is documented properly.  They take as much of the headache out of the loan process as they can.   A facilitator may also offer automatic payments so that the loan can be repaid without a question about the day it is due.

Pros of Peer-to-Peer Loans:

One benefit of peer-to-peer loans is that they can be used for almost any financial need.  This type of loan may be used instead of a second mortgage or a traditional bank loan because set-up fees and other fees are generally minimal.

Another benefit is that these loans require much less paperwork than traditional bank loans.  This eases the burden on the borrower to fill out a huge stack of forms and provide many documents before the loan can be funded.

Lower interest rates are another reason that borrowers choose peer-to-peer loans over traditional financing.  Low interest rates help both borrowers and lenders save a considerable amount of money.

Lenders benefit from peer-to-peer loans because they provide yields that aren’t available with traditional savings accounts or other low-risk investment options.  People who lend out their money themselves cut out the middleman, which allows them to make more in interest without having to charge a higher rate.  Even lenders who work with a facilitator typically earn more than they would through bonds, CDs or other investments.  They also get the psychological benefit of knowing they are helping out someone in need.

Cons of Peer-to-Peer Loans:

One con of peer-to-peer lending is that the lender may have to take a loss if the loan is not repaid.  The lender is also responsible for collecting the loan unless they use a loan facilitator to handle the paperwork and collection process.  Having to collect money from a family member is not something that most people enjoy, so using a loan facilitator is usually worth the cost just to have someone else doing the collecting.

Peer-to-peer loans are not insured like many other investments, so even the initial investment is at risk if the borrower defaults on the loan.  The best way for lenders to protect themselves against default is to lend a small amount of money to several borrowers instead of lending a large amount of money to a single borrower.  It is considerably less likely that many people are all going to default on their loans.

No investment is without risk, and many boomers have found that peer-to-peer lending is a wonderful way for them to help out people that they know or don’t know and make money at the same time.  Anyone who is considering using peer-to-peer lending as an investment should talk to their financial advisor about their unique financial situation before deciding if this investment is right for them.  Most lenders benefit greatly from having a peer-to-peer loan facilitator help them through the paperwork and handle the collection process for them

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