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Do you want to invest or borrow funds without going through traditional banking and its sometimes too rigid administration? Peer-to-peer Lending is your solution.
It is indeed a crowdfunding model allowing individuals to lend or borrow credit via a virtual platform, without a financial intermediary. It is a loan mechanism very popular with households and investors for its many advantages, but which is not without drawbacks.
We explain what peer-to-peer lending is and how it works.
How does this type of loan work?
The objective of this type of loan is to connect lenders and borrowers in order to limit the intermediary costs of the bank. Thanks to this system, you can obtain credit, but also invest your funds by lending to individuals. The device is in itself simple, the P2P platform plays the role of market intermediary between these two groups of individuals.
Indeed, the borrower submits his project, specifies the amount he wants and provides his personal information to the platform. This is responsible for meticulously analyzing the solvency and the risks it presents. If it is viable, the borrower is granted the necessary funds to carry out his project under a contract.
The sums collected are financed by multiple individuals registered on the platform. These will invest in several projects according to their criteria, in order to spread the risks of insolvency. The repayment of the loan and the interest is made according to the deadlines predetermined by the investor and the borrower.
Why are so many people lending through these platforms?
The enthusiasm for these platforms lies in the fact that they promote access to credit for various atypical profiles generally rejected by the traditional banking system. Due to the simplicity of their formalities and the speed of the process, P2P sites allow a good number of households to easily obtain loans or to invest with relative security.
The equity loan adapts to the needs of everyone. Whether you are a student, a company or an individual…, it offers you the possibility of obtaining the necessary financing for your various projects. In addition, the interest rates on these platforms can be lower or lower than those of credit organizations. These virtual intermediaries are therefore an interesting alternative to the banking system.
For investors, this system is a way to make their money grow. Indeed, it offers better rates of return higher than most savings vehicles. In addition, the risks here are pooled thanks to the micro-loan system. Beyond the interesting remunerative aspect, there is an undeniable social and solidarity dimension.
What happens in the event of non-reimbursement?
One of the risks you may face in peer to peer lending is default on repayment. It can indeed result in a loss of the amount invested. That said, the solutions adopted in the event of non-reimbursement vary depending on the P2P platforms.
To compensate or mitigate the effects of the borrower’s default, some platforms set up reserve funds or grant non-repayment guarantees …
In practice, the platforms will set in motion all the legal avenues to induce or force the borrower to repay the loan. Notably, the re