Peer-To-Peer Lending
Introduction.
Peer-to-Peer lending could be just the thing to appeal to anyone seeking a new way to make their capital work for them, or indeed, anyone needing to borrow money. With the real estate markets still in turmoil and everybody feeling the pinch from the economic squeeze, there are more and more people looking for new investment opportunities and new ways to get loans. A peer-to-peer loan is one that is given directly from one person to another, without using a bank or finance company.
Peer-to-Peer Lending in action.
Today person-to-person loans are primarily arranged through social networking websites using Web 2.0 technology. Often simply referred to as social lending clubs, one such website is the established and reputable - Lending Club. Anyone wanting to borrow or lend money through a peer-to-peer lending club has to register certain details and agree to a credit check being run on them. After that anyone seeking a loan posts the details of the amount of money they’re seeking and what it will be used for. Then, through the social networking website these requests are viewable by people prepared to lend money in a person-to-person loan; resulting in someone agreeing to enter into peer-to-peer lending with the borrower. In peer-to-peer lending there are risks for the lender. Whilst the social lending club website will take precautions to protect lenders from borrowers defaulting on their payments, the lender must understand that they’re entering into an unsecured loan.
Can students use peer-to-peer lending?
The simple answer to that question is - yes, of course they can. Quite often students will apply to borrow money in a peer-to-peer loan, in order to supplement their annual student loan. However, there are cases of students operating as lenders on peer-to-peer lending websites. It shouldn’t be that surprising that students want to see how successful they can be as investors in people-to-people lending. An example of this could be a student at the Purdue University in Chicago who’s majoring in one of their financial courses; something like Financial Counseling and Planning. Such a student is bound to have at least an interest in how finances and economics operate. One way they can test themselves out in the real world, rather than as a student simulation, would be to set themselves up as a lender in a peer-to-peer lending website.
Can a student afford to be a lender in person-to-person lending?
Again the answer to that is, yes. Just because someone wants to lend money to other people through a social lending club - doesn’t mean they have to have thousands and thousands of dollars of capital. Peer-to-Peer lending clubs work through the internet. Therefore, a lender could end up loaning money to someone else - anywhere in the world. Subsequently, some loan requests are for, what to us in the west, would be very small amounts. So, our student lender could loan say $1000 to someone in Asia - that would be the equivalent of many times that amount here in the USA. However, the student still has to choose a project and has the risk that even their $1000 might not get repaid. On the matter of project choice; the same is true for anyone - not just students in Chicago - you get to choose which project(s) to lend to. Some people only want to invest in socially worthwhile projects or altruistic ones; whilst others might only be interested in high risk-high gain ones.
Spreading the risk in peer-to-peer loans?
Picking up on the idea of the amount of money to lend as investments in a peer-to-peer lending club. Obviously everything is relative to the amount of money you have to invest in the social lending website; but by-and-large you’re better off investing in lots of small loans to several different projects than putting all of your money into one project. Whether a small amount of money to you is $1000 or $20,000 is irrelevant; just as the old saying goes “don’t put all your eggs in one basket”. By spreading your money about in several projects you should considerably reduce the risk of losing your money to someone who defaults on their repayments. Also, don’t be concerned that by investing small amounts of money you won’t be able to invest in the bigger projects. Quite often several peer-to-peer lenders will work together to finance a large project, spreading the load and risk amongst themselves.