The financial crisis of 2008 tightened the lending market significantly. With the worldwide credit crunch, which turned the housing and stock markets upside down, the chances of finding traditional lending sources were almost non-existent. Peer to Peer lending sources were the main options available. Understanding how Prosper Investing works will show you why it is the choice for today.
What is Peer to Peer Lending
Traditional loans are funded through financial institutions such as banks and mortgage companies. With the financial crisis that occurred in 2008, this source is all but dried up. The economy went into recession and took a major down turn. This created a situation that if a loan did get funded, and that was a big if, it was at high rates of interest for the borrower. There had to be another option out there to help get the economy moving and provide a lending source. Peer to Peer (P2P) lending was that option.
Peer to Peer lending has been around since the early 2000’s. It is basically a group of investors who pool their money and offer loans to individuals and businesses. When an application for credit is approved, then it is funded by an individual investor or a group of investors. They can offer a loan at a lower interest rate because they are cutting out the banks and their high overheads. This saves the borrower money and lowers the payments. It gives the investor a higher rate of return on their investment than they would receive in traditional savings accounts and money market funds. Allowing for more stability than the stock market, the investor is more likely to receive their money back. This is one of the great ways to invest money, have low volatility and high rate of return.
In many states, investors have to meet certain requirements to participate in peer lending. This can preclude those people who are not liquid in their assets, which is a benefit to the consumer as they do not have a long wait for funding of the loan. It can potentially hurt investors who do not have a high annual income or net worth. However, those investors who are able to invest money in this system find they get a higher rate of return on their money. Because applicants have to meet certain credit requirements and are given a risk score, there is a lower risk than other forms of investment.
For the borrower, you can receive a lower rate of interest. Banks have high overheads, and a wide range of investments themselves. This translates into higher interest rates. By cutting them out, you are saving money in the long run. The disadvantages are that you are generally limited to a $25,000 cap. This means for high funding needs, you will have to find other, often more expensive, sources.
Investing in today’s market can be tricky. By investing in peer to peer lending, you can help a person who needs to borrow save money and you can get a high rate of return on your investment.