1.1 What is Peer-to-Peer Lending?
Welcome to Lesson 1.1: "What is Peer-to-Peer Lending?"
In this lesson, we will explore the fundamental concepts of peer-to-peer (P2P) lending, its role in the financial market, and the benefits and risks associated with this innovative form of lending. By the end of this lesson, you will have a solid understanding of P2P lending and its significance in the financial ecosystem.
Learning Objectives
- Define peer-to-peer lending.
- Understand the key concepts and mechanics of P2P lending.
- Recognise the role of P2P lending in the financial market.
- Identify the benefits and risks associated with P2P lending.
1. What is Peer-to-Peer Lending?
Definition:
Peer-to-peer (P2P) lending, also known as social lending or crowd lending, is a method of debt financing that enables individuals to borrow and lend money directly to each other without the involvement of a traditional financial intermediary such as a bank. This is facilitated through online platforms that match borrowers with investors willing to fund their loans.
Key Concepts:
- P2P Lending Platforms: Online marketplaces that connect borrowers seeking loans with investors looking to lend money. These platforms handle loan servicing, payments, and regulatory compliance.
- Borrowers: Individuals or businesses seeking to obtain a loan. They typically apply through the P2P platform, which assesses their creditworthiness and assigns an interest rate.
- Lenders/Investors: Individuals or institutions looking to earn returns by lending money to borrowers. They can choose to fund whole loans or fractions of loans.
- Interest Rates: Determined based on the credit risk of the borrower, the amount of the loan, and market conditions. Rates can be fixed or variable.