Social lending allows you to fund a personal or business loan from individual investors without the complexity of a bank loan. Also called peer to peer lending, this is a new trend in online financing options that reduces the high cost of traditional loan options. Using a third party social lending service a borrower can be directly connected to potential investors.
Peer to peer lending offers borrowers lower interest rates and investors a higher rate of return on their investment.
Social lending has helped borrowers and lenders connect through a simple and secure online service. Peer to peer lending offers a new alternative to personal loans and lower interest rates. Peer to peer lending is also a great alternative to standard investment options and allows you to reduce risk and increase diversification through the unique arrangement with borrowers.
Advantages of Social lending:
- Attractive interest rates for borrowers
- Above average returns for investors
- Simple and secure process
- Reduce risk through diversification
- Help others in need with social lending
Reduce Cost and Complexity
Today these sites have led the way in financial innovation offering a new platform for consumer loans and investing. Borrowers continue to take advantage of social loans because they can find loan terms at more attractive rates than are offered by banks or credit cards.
Each loan is funded by investors and facilitated by the lending network; a simple process that cuts down on the costs usually associated with personal loans. Social lending greatly reduces the cost and complexity that comes with traditional banking.
The simple structure of fixed-income investments is another benefit of peer to peer lending. Each loan generates a monthly cash flow from the borrower on the payment of principal and interest. Investors have the opportunity to invest in a wide range of notes to lower risk and improve performance.
Diversification and Risk
Social lending allows you to manage your investment risk by spreading your money across many different loans at once. By diversifying your portfolio you can reduce the exposure and risk of default that is associated with a single investment.
Peer to peer lending can help you reduce risk by investing in loans that are not correlated and at smaller investment increments. With a well thought out investment strategy and a long term mindset, P2P lending can offer lower investment volatility.
There are many ways to diversify your investments using this service. Most sites allow you to select each note you invest in. You can view credit information for each loan listing to better judge the risk factors involved. If this information is not enough you have the opportunity to ask the borrower follow up questions.
Hassle Free Borrowing
Peer to peer lending is completely secure and confidential. To begin borrowing you will need to register at one of the major sites like Prosper or Lending Club. Although each peer to peer lending service is unique, you will likely go through a few basic required steps. They will collect information about your identity and evaluate your creditworthiness. From this point you will be able to fill out a simple loan request.
If you meet the minimum criteria and are able to pass the initial approval you will be able to view several loans that you qualify for. Review the loan options and choose one that best fits your financial needs or circumstances. Once a loan is chosen you will need to authenticate your bank account with the site before the loan will be listed.
After its initial posting the loan will be available to interested investors to fund the loan amount. Loans are typically available to investors for two weeks or until the loan is completely funded.
Depending on the risk factors associated with your loan it may not get funded at all. Investors must weigh your credit history and other factors against the return. Most loans on social lending sites get funded due to the strict screening process by the lending site. According to recent statistics, a leading social lending site only approves around 10% of loan requests.
Lower Interest Rates
Social lending offers lower interest rates than traditional funding opportunities like credit cards or bank loans. Lower interest rates give borrowers more attractive financing options without the complexity of a bank loan. Social lending interest rates are determined by credit score, loan amount, loan term, and credit history.
Peer to peer lending has provided a unique opportunity for both borrowers and investors in our current economic environment. Others are seeing the benefits as well. Venture capital firms continue to invest large amounts in social lending sites like Lending Club and expect to see massive growth in the personal lending market in the next five to ten years.