Peer-to-peer loans or person-to-person lending are loans granted directly by individuals to individuals as private loans while completely or partially eliminating the role of banks and other traditional financial institutions.
Some of the well known online platforms for these types of loans include Zopa, Prosper and eLolly. Basically, internet based peer-to-peer loans can be differentiated from those issued on a family and friends level. A special variant is the award of such loans as small loans or micro loans to entrepreneurs in the developing world.
The loans are not originated on the basis of deriving profit for the creditor, but to support the work of the borrower from a charitable perspective. Person-to-person lending models nurture social components that cannot be found in conventional banking models, at the same time preserving a balance of diversification.
The online peer-to-peer loan marketplace model enables private lenders to find private borrowers and vice versa. This model brings borrowers and lenders together using an auction style process. While also seeking to capitalize on the lack of operating cost synonymous with online ventures, thus cutting down on infrastructure costs like physical branches.
The family and friends model dispenses loans between borrowers and lenders who know each other already. Another form of peer-to-peer loan, involves a lending community, in which a group of people borrow each other money in a rotary fashion.
Peer-to-peer loans are based on the theoretical assumption that improving the existing interpersonal relationships or other forms of social bonding, promotes fiscal responsibility while ensuring the repayment rate is kept low.
This lending option enables participants to take charge of the allocation of their funds, contrary to the conventional bank lending models which syndicate funds and cancel out the actual owners of the funds from deciding who may borrow the funds, and on what terms
Peer-to-peer loans have also evolved into the micro-credit sector, the micro loans enable the alleviating of poverty as well as supporting small businesses in developing countries and to support them financially.
Direct lending involves lending of funds to borrowers on the strength of their credit rating, the risk of capital and interest for the lender is that the borrower could fail to repay the loan. And to mitigate this risk lenders tend to invest modest amounts into a great number of loans, thus reducing the sum of money issued to an individual.
Kiva.org was launched in 2005 as the first micro-credit platform, and the loans can be awarded to small businesses. Usually this is done through local micro-credit institutions.