What is peer-to-peer lending?

What is peer-to-peer lending?In the age of social networking and social media, it’s little surprise that social finance would follow. The ABC’s The Checkout, recently ran a segment about peer-to-peer lending. It’s a new concept in Australia, but it’s already working in some other countries. I want to take this opportunity to explain how it works.

Peer-to-peer lending, also known as P2P lending, social lending and crowd funding, involves connecting borrowers with investors. The process is coordinated by a peer-to-peer lending company that screens borrowers and spreads the risk between a group of investors. For example, Jane Smith’s loan of $1,000 might be distributed between 10 investors who contribute $100 each.

Peer-to-peer lending companies say that the benefits are two-fold: Low overheads allow them to keep costs down for borrowers while delivering good returns for investors. Most peer-to-peer lenders approve only borrowers with good credit histories, which is how they deliver predictable returns to their investors.

Peer-to-peer lending is expected to take off in the coming years and you can bet that traditional financial institutions will be watching closely. The banks have had a stranglehold on loans and social lending is likely to make them sit up and take notice. Right now, SocietyOne is the only fully-compliant peer-to-peer lender in Australia.

Social finance is an exciting development and I like the fact that it gives consumers another option. But nothing changes the fact that a loan is a loan. Peer-to-peer lending has all the same commitments and responsibilities as traditional lending. The best strategy is to save for the things you need!

MyBudget has helped over 40,000 Australians to stop living week to week and start saving. Why not join them? Contact us today to book your free, confidential, no-obligation consultation.

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