How To Use Peer To Peer Personal Loans

By Author: Scott Staudt
Total Articles: 91
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There is an old saying: "There is nothing new under the sun", and this can be applied to peer to peer personal loans. In ancient times, before banks were around, money was lent from one individual to another. If someone required money to build something or expand a business, he would approach someone who he knew had some money to spare. This was person to person, or peer to peer lending, at its absolute basic. Trade and commerce developed, and specialization became the norm, with the result that certain businesses were set up solely for the purpose of lending money, at a profit. Many times, these organizations were formed as savings and loans, so that they would receive savings deposits of individuals who wanted to receive a return on money they were not using. Banks or other financial institutions took advantage of this phenomenon by using the deposited funds and lending it to people who needed funds. The difference between what they paid their depositors and what they got from their borrowers became their profit.

But many factors in the lending business have made people revisit the old concept of peer to peer ...
... personal loans, with the result that both lender and borrower can gain an advantage. Since the "intermediary" of a bank is eliminated, some people refer to this process as disintermediation. Today's peer to peer personal loans are not limited to people in the same locale, since they can be administered on an online marketplace, where people in need of funds can be matched with those who are willing to lend. Sometimes these online marketplaces opearate like auction sites and act as a connection for the borrower to find the lender. Today's consumer is very attunedto this concept due to marketplace sites such as Ebay, but instead of hard goods or e-goods, buyers and sellers are actually dealing in money for sale. Both parties have an advantage by eliminating the middle man.

One of the greatest benefits of peer to peer personal loans is how they change the risk scenario for lenders. Frequently, personal loans are parcelled so that a lender lends his money to a number of different borrowers and, conversely, the borrower is receiving his loan from many different lenders. A good example would be a young man who wanted to take out a loan for $1,000 for an engagement ring for his fiancée. There may be an investor on the peer to peer lending site who wants to lend $1,000. A lender may only lend $100 to this individual person's romantic endeavor. But he can easily find 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 his total risk is much lower than it would otherwise have been. Borrowers, in this situation, have an advantage since they will have that many more lenders bidding for their personal loan.

When a concept has a sound foundation, it is no surprise that it resurfaces as society faces new challenges, and this is precisely what has happened with peer to peer personal loans.
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