Along with a vast number of other financial services, it is now easier than ever to obtain a loan.
Traditional bank loans are falling under threat from peer-to-peer lending, also known as P2P lending.
The P2P loan is revolutionising the lending process by moving it entirely online. It’s removing excessive paperwork, obliterating the traditional loan application to approval timeline, and allowing you to do it all from your living room. However, the technology is still new and accompanied by misconceptions and limits, meaning there are pros and cons to each structure. This article will offer some insight into how P2P lending works and hopefully provide some clarity on which option is best for your needs.
P2P Lending Gaining Momentum Wordwide | Source: JP Morgan, Asian Banker Research
For centuries the traditional bank loan had always been the only real option for borrowing money, up until 2006 when P2P lending took off and began moving from strength to strength.
Peer to peer lending is, as it suggests, the lending of money between two individuals, or an individual and a small company. Whilst typically not as large as a traditional bank loan, P2P lending allows you to access a loan through a digital platform with minimal documentation. Companies that match you to a lender, such as small loans by Monzi, are now in abundance. Meaning you have many options available to you when choosing where you want to source your loan.
How P2P Lending Works | Source: Jean Galea
P2P operates the same as a traditional loan to some extent. For example, your income, expenses, debt, and credit history will all be considered. Where the two differ, however, is in flexibility and timeliness. Your P2P lender may be far more lenient when evaluating your credit history and may be able to offer you same day approval in some situations.
P2P loans can be used for anything; they are typically taken for personal or business use due to their relaxed approval criteria. The traditional bank loan is more fixed when it comes to what you can use the money for. Usually, you would go to a bank for a home, car, or business loan. Banks do offer personal loans: However, a personal loan through a bank fails to compare in convenience to a P2P loan.
P2P Business Model | Source: BBN Times
Although peer to peer lending is developing in popularity for several reasons, it is not without setbacks. Here are some of the pros and cons that come with a P2P loan:
Traditional Banks | Source: BBN Times
Just as P2P lending has its pros and cons, so do traditional bank loans. Here are some of the pros and cons of conventional bank loans:
The choice you make when deciding which loan method to opt for should be based on your needs. Neither loan form is going to become obsolete just yet. If you need a large amount of money and are ok with waiting for your approval, a traditional bank loan may be for you. If you need some extra cash to get something done and don’t want the hassle of operating through a bank, P2P lending may be your best bet.
Regardless of which platform you choose, you should practise responsible borrowing. If you are struggling with current debts or are unsure how to manage a future loan, get in contact with a financial advisor, or read through your local government pages for more information.