Updated: May 23, 2018
What is P2P?
Peer-to-peer (P2P) lending is a new method of debt financing that allows individuals to borrow and lend money directly from each other without the use of an official financial institution as an intermediary. Traditionally, when individuals or small businesses need a loan, they apply for one from bank. Nowadays, borrowers and investors can meet on peer-to-peer online platform at an agreed interest rate with varying short-term maturity dates.
How does P2P lending work?
· Investors decide how much money they want to invest on a particular online P2P platform. They also choose how their money will be used, whether to fund one loan in particular, or to invest in a portfolio of loans. In some cases, investors may be able to choose the minimum interest rate and select the loan term (short term or long term).
· Borrowers begin an online application on a P2P platform and choose the loan that fits their needs.
How are interest rates set?
· Borrower sets interest rate
Borrower decides the maximum interest rate he is willing to pay.
· Platform sets interest rate
The platforms categorize the borrowers to a risk category that determines the interest rate that he will receive.
· Rates are set matching demand and supply
Interest rates are moving based on the demand and supply activity.