Peer to Peer Lending, or P2P Lending as it is commonly known, is the latest way to borrow money. In this type of transaction, the money is borrowed directly from other people, online. There is no involvement of any kind of traditional financial organization or institution. This is a great way to transact, especially for people who want to lend money or make loans directly available to ones, who are in dire need. Peer to Peer Lending occurs primarily through three modes of transaction - one is the ‘online marketplace’ mode, the second is the ‘family and friend’ mode and the third is the ‘community lending’ mode. Since P2P lending does not have involvement banks or financial institutions, borrowers have the chance to receive interest rates that are favorable than what they might have got if they had followed the traditional way of lending, i.e. via a financial institution.
Types Of P2P Lending
Online Marketplace Model
The marketplace (internet) of this lending enables the "peer leaders" to locate the “peer borrowers” and vice-versa. This type of P2P model connects the borrowers with the lenders through some an auction-like process, in much the same way as eBay or Amazon does, helping the borrowers to locate lenders with the ‘lowest’ interest rates. In this type of dealing, the lender who is willing to provide the lowest interest rate wins the borrower. Apart from the borrower and the seller, the marketplace, in this type of transaction, might also include other intermediaries (third-party) who resell the loans.
Family & Friend Model
The ‘family and friend’ mode of the lending varies from the other mode, in that the borrowers and the lenders are already acquainted with each other, and formalization of personal loans takes place between them. This form of economic exchange can take place between two friends or between two business colleagues.
Community Lending Model
Another very interesting form of social lending, which has made its presence felt in the present times, is 'Community Lending'. It is yet another form of Person to Person Lending, in which intra groups are involved. This system works on the model of ‘many to one’ or ‘one to many’.
Benefits of P2P Models
There are a number of benefits in all the models. While the marketplace model's main benefit is the 'match making' aspect of it, the family and friend model always pays interest in things like online collaboration, loan facilitation and even servicing. As for community lending, it diversifies the risk involved. Instead of a single person being responsible for the repayment, the borrower’s immediate community or social group is held responsible. As such, repayment is positively incented by the mutual group or by social pressures. Such forms of transactions have added a social component that was lost in the traditional economic institutions like banks and also allows participants to control the allocation of their own capitals directly.
Peer to Peer Lending has given a new meaning and a new dimension to economic exchange. Today, this form of lending has also emerged in the microfinance sector, enabling institutions to gain access to capitals that would not have been possible otherwise. In a broader sense, one may say that P2P lending has contributed a great deal in alleviating poverty and promising a better standard of living for the general public. Talking figuratively, in the year 2005, there were $118 million of outstanding peer-to-peer loans. In 2006, there were $269 million, while in 2007, a total of $647 million.