What Is Person To Person (Peer to Peer) Lending?

Person to person lending, also known as peer to peer or p2p lending is the newest thing to hit the World Wide Web. As the name suggests, this type of lending scheme foregoes all financial institutions and lending companies altogether. Instead, borrowers and lenders transact business on a personal (or almost personal) note. This type of lending actually came into existence way before the introduction of social networks over the Internet. However, the technology did give p2p such a boost in the marketing department that almost every Internet junkie now knows about the lending scheme.

There are actually two existing types of p2p lending: the family-and-friend model and the online marketplace model.

Family-And-Friend Model

This is probably the one model that truly carries the essence of peer-to-peer lending. Basically, this type of lending entails the borrower to seek financial assistance from family members and friends – or any acquaintance for that matter. Often, this is an agreement similar to most personal loans, where the lender forks over the dough without so much as asking for collateral. In some cases though, collateral could be asked for in terms of service or material thing; examples of which include: the borrower mowing the lawn or the lender using the borrower’s car until the entire debt is paid.

Lending from family members and friends has one advantage: there is no going interest rate to worry about. Often too, because this is a form of verbal agreement, a borrower could simply ask (or to be more precise: beg) for an extension of the payment period.

Online Market Model

The online market model literally exploded when Internet junkies begun to harness the power of most social network sites. After all, p2p sharing has already become a big thing over the World Wide Web. The rationale goes: if documents, pictures, music files and movies could be shared in virtual space, why not financial assistance as well?

At first, this type of sharing was relegated only to individuals talking about loans and payment options. There were no formal policies regarding how loans should be doled out or how payment should ensue. However, some enterprising individuals decided that there should be a standardized model to protect the lenders from people who have no intention of returning possible loans; and protect the borrowers from exorbitant interest rates.

The standard online model now, entails both borrowers and lenders to communicate via an open portal or forum, where one borrower declares the amount he or she needs, and lender make bids as to who can offer the lowest interest rates. This auction-like atmosphere ensures that the borrower can accept more-than-affordable loans.

In this regard, the borrower or lender can: exchange bank account numbers to complete the transactions (which is a very risky maneuver); or exchange addresses where money could be sent via money order or check (risky as well); or exchange Paypal account (which is more secure); or subscribe to the same online “bank” which is basically a third party financial organization that either sponsors the open portal or owns the actual website where the transactions take place.

In other instances though, as with the case of student personal loans, an online company matches a borrower with a potential lender. This match-making process usually secures the lender a personal loan with very lenient payment options. However, the borrower must “sell” his case to the lender(s); and only afterwards can repayment schemes could be discussed.