Pros and Cons of Peer-to-Peer Lending for Borrowers and Lenders

If you're in need of cash, or if you have an excess of cash, you might consider peer-to-peer lending versus traditional borrowing or investment practices. Peer-to-peer lending, also called "social lending", is the practice of borrowing or lending money without intermediaries such as banks or other financial institutions. There are several places online, for example, where peer-to-peer lending is facilitated.

There are several pros and cons of peer-to-peer lending for both borrowers and lenders, and it's important that you understand the process before you dive right in. This practice is still in its infancy, especially when compared with traditional avenues of money lending, and you don't want to place yourself in an indefensible position.

Pros

The pros of peer-to-peer lending are similar for both borrowers and lending. The main one, of course, is that you don't have to go through the lengthy process of borrowing money or investing cash in stocks or bonds. No intermediary is required, which means that your money isn't going to a third party, and this is attractive for many people all over the world. Additionally, borrowers and lenders gain access to hundreds of potential financial partners at one time, which allows them to compare rates and choose a beneficial partner.

In fact, peer-to-peer lending web sites such as Zopa and Prosper.com are set up similar to auction sites like Amazon and eBay, where borrowers and lenders can auction what they have to offer and come away with the highest (or lowest) bidder. This allows everyone to choose their own terms and interest rates so that the exchange is beneficial.

Cons

As with just about every financial model, there are cons to peer-to-peer lending as well. For lenders, there is very little reassurance that monies will be paid back on time (if at all), and there are few methods of recourse for non-payment. Most lenders must go through small claims court or civil court in order to collect unpaid debts from borrowers, a process which is time-consuming and expensive. Furthermore, lenders and borrowers might be located across the country from one another, which raises the question of jurisdiction.

For borrowers, the cons are less severe, but one has to be careful when evaluating the terms of peer-to-peer lending. Lenders on the Internet are just as capable of hiding terms in the fine print as banks and credit unions, and the terms are not always as favorable as they appear at a passing glance. Additionally, large debts may be "sold" to a group of investors, in which case the terms for each portion of the loan may be different.

Consensus

The pros and cons of peer-to-peer lending are worth further scrutiny, but in the end, it all depends on how badly you need the money (or want to invest), and how secure you feel in exchanging money via the Internet. Conduct significant market research before you decide on this avenue, and make sure you're working with a reputable web site with few complaints.

SOURCES:

Mortgage News Daily, Peer-To-Peer Lending: A Prototype For The Future Of Mortgage Lending