How To Use Peer To Peer Personal Loans

There is an old saying: "There is nothing new under the sun", and this can be applied to peer to peer personal loans. In the old days, banks and other lending institutions did not even exist. People who needed funds could usually find the person in the area who had excess funds to lend out. This was the basics of person to person, or peer to peer loan. As our society and its institutions became more formalized, specific businesses were established for the main purpose of lending funds in exchange for the payment of interest. Frequently, these businesses did not use their own funds, but took deposits from people in the area who desired to earn some return on their excess cash. The financial institution acted as an "intermediary", taking money from depositors and paying them interest at a certain rate, then lending that money to borrowers at a higher rate. The lending institutions made money paying interest on deposits at a lower rate than the interest they earned on loan.

But many factors in the lending business have encouraged people to revisit the old concept of peer to peer personal loans, with the result that both lender and borrower have an advantage. Eliminating this middle man, or intermediary, is called disintermediation. Today's peer to peer personal loans are not limited to those in the same locale, since they can be administered on an online marketplace, where those in need of funds can be matched with those who are willing to lend. Often these marketplaces are set up as auction sites, where the site assumes the responsibility of matching, credit checking and processing. The site connects the lenders and the borrowers in an auction process, similar to Ebay for goods, where the lenders compete with each other to provide the lowest rate to borrowers, and borrowers compete with one another to obtain the best rate for their personal loans. When the banks are taken out of the picture, so is their profit, and that difference is split into savings for the borrower, and increased profit for the lender.

Another important advantage of peer to peer personal loans is the way in which the risk of these loans is managed. Frequently, personal loans are parcelled so that a lender gives his money to a number of different borrowers and, conversely, the borrower is receiving his loan from many different lenders. Imagine that you, as a borrower, wanted to get a personal loan of $1,000 for an engagement ring. The peer to peer lending site might have many lenders who are willing to invest $1,000 in a loan. A lender might only lend $100 to this young man's romantic endeavor. But he can easily locate another borrower, someone who is using the funds for loan consolidation, and lend him another $100, then find another borrower and lend him money for home repairs, etc, until he has lent his total a$1,000 investment.

His $1,000 investment is, in this manner, going to be spread out over ten different risks, so that the overall risk is much lower than it would otherwise have been. The converse advantage for the borrowers is that they have many more lenders bidding for their personal loan business.

This "old but new" solution of peer to peer personal loans turns out to be a win-win situation for all the parties involved.

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