Peer-to–peer lending, also known under the names P2P loan (equity loan), social loan (or P2P loan), allows borrowers to connect directly to lenders without the need for intermediaries. In a P2P loan scenario, lenders are generally referred to as “investors,” who lend money to qualified applicants. The prices and terms of the loan contract are set by the intermediary website (P2P platform). Once these conditions have been met, the transaction will be processed.
It is important to understand traditional banking models in order to better understand P2P lending. You will need to fill out a loan application if you wish to borrow money. Before granting you a loan, the bank will assess your creditworthiness and other relevant factors. Once the conditions are met, the bank will source capital either from the central banking or from savings deposits from its other customers.
This method has its own challenges.
- Banks typically have a strict risk management strategy that automatically disqualifies those with poor credit or no credit history.
- Banks typically offer low rates and charge fees on the total amount of the loan. This increases the cost of repayments.
- The traditional banking system can be slow as a result of a lack innovation and inability to adopt new technologies.
Traditional P2P loan
Traditional P2P loans are when fiat currencies like USD, GBP or YEN can be traded between two parties that are not part of the traditional banking system. Peer-to peer lending websites like Prosper, Lending Club, and Peerform can offer multiple loans with competitive interest rates. These P2P platforms typically highlight the qualifications and requirements of their borrowers to save time during the application.
P2P cryptocurrency loan
The introduction of cryptocurrency, particularly the Ethereum blockchain, has seen the P2P lending market evolve over the years. P2P lenders have the option to access financial services via decentralized networks and smart contract. This is commonly known as DeFi (decentralized financing).
With blockchain technology, lenders and borrowers can enter into loan agreements directly without the assistance of an intermediary. Smart contracts can be executed according to the loan terms automatically, which allows for trustless transactions. At the time this is written DeFi PulseThe current total locked-in value (TVL), in the DeFi loan marketplace is just over $83 billion.
Similar to traditional P2P loans and loans on the blockchain, loans that occur on this platform still require collateral. These collateral can be deposited in fiat, digital, or both. The collateral is usually held on an intermediary website, P2P crypto platform, or where it will be stored in a smart contract, according to the terms of the agreement.
The collateral provided determines the maximum amount an individual can borrow. This is also known as the collateral ratio or collateral factor. This system is not possible because the lender does not reveal the identity of the borrower, so there is no credit history or credit rating. Lenders collect interest from borrowers. This is usually at a fixed rate that has been agreed upon in advance. P2P cryptocurrency platforms may offer incentives or other bonuses to lenders to help them attract more volume to their platform, so that their lending ecosystem functions properly.
Some of the most popular crypto-based P2P lending programs include:
These decentralized platforms allow anyone with internet access to obtain loans and have sufficient funds to deposit collateral. These services are open 24/7, seven days per week, and operate more efficiently than traditional banking services. This is why they have seen a huge increase in popularity in the past two year.
Lenders and borrowers can now communicate anonymously because there is no KYC requirement. This is something that was impossible in the past.
Despite this, the steep learning curve that comes with P2P crypto lending, especially for those not familiar with the basics of cryptocurrency transactions, is one of its main flaws. The UX for large platforms can be quite confusing and there is always uncertainty regarding their safety and security. Many major lending platforms have experienced hacks and exploits that have caused financial losses for both lenders and borrowers.
As the industry matures and finds new ways to solve these problems, it is likely that crypto-P2P lending platforms will play a greater role in our collective financial future. This should open the door to a simpler, more accessible, and more expensive solution. -Effective loan form.
About the Author
Michael is the Managing Director at Invezz.comSupervise the strategy and growth of the brands. Over the past 10 years, he has been a leader in start-ups and comparison brands as well as marketing strategies across a range of industries. He is the cofounder of Kinetic Investments. His experience includes product marketing, investing, cryptocurrency and business operations.
Michael enjoys everything centralized, cares deeply for the planet, and supports initiatives that promote a more just society. She describes her free time as being occupied with charity, commerce, and travel.