Loan default prediction by combining soft information extracted from descriptive text in online peer-to-peer lending | Semantic Scholar (2024)

FAQs

What is peer-to-peer funding as a source of finance? ›

Peer-to-peer lending (P2P) is a way for people to lend money to individuals or businesses. You – as the lender – receive interest and you get your money back when the loan is repaid.

Peer-to-peer (P2P) lending platforms and traditional lenders both offer online loans. The primary difference between the two is that P2P platforms connect investors who lend money to borrowers trying to get a loan. Traditional lenders use their money to finance loans directly.

A potential borrower interested in obtaining a loan completes an online application on the peer-to-peer lending platform. The platform assesses the application and determines the risk and credit rating of the applicant. Then, the applicant is assigned the appropriate interest rate.

The lender provides the funds, and the borrower uses the funds to finance a debt. P2P lending is an attractive option for borrowers because it typically requires low interest rates and shorter loan terms than traditional loans. In contrast, crowdfunding focuses more on the total amount of funds a campaign can raise.

If the borrower defaults, lenders often lose their money

While some peer-to-peer loans are secured, they are most often unsecured loans. This means the borrower isn't borrowing against any collateral, and if they can't pay their loan, the lender loses their money.

The main peer-to-peer lending risks are: Yourself (psychological risk). Not enough diversification (concentration risk). Losing money due to bad debts (credit risk).

Monthly Income – Investors are paid every month when borrowers make payments on their loans. This means a solid portfolio of P2P loans can generate a steady stream of passive income. Higher Yields – Without question, the single most attractive aspect of P2P lending for investors is the potential for higher yields.

Peer-to-peer lending often offers lower interest rates and more competitive fees, but also carries higher investment risks compared to traditional lending and charges fees to both borrowers and lenders.

So, is peer-to-peer lending safe? Like any investment, it does put your capital at risk. However, given the predictability of the repayments from borrowers and other safeguards in P2P, other forms of investment are often risker.

By connecting with their peers, borrowers avoid the sometimes strict credit requirements and lengthy application process of traditional lenders. Investors benefit from potentially higher returns than other types of investments. Convenience is another factor.

Is peer-to-peer lending legal? ›

Because, unlike depositors in banks, peer-to-peer lenders can choose themselves whether to lend their money to safer borrowers with lower interest rates or to riskier borrowers with higher returns, in the US peer-to-peer lending is treated legally as investment and the repayment in case of borrower defaulting is not ...

The peer to peer lending portals are classified based on the nature and purpose of borrowing. For example, while LendingPoint, a Georgian lending platform, makes available financing options for people with fair credit, Universal Credits is for those who need to improve their credit rating.

Peer-to-peer lending offers an alternative form of business finance which allows individuals or businesses to lend directly to other people or businesses, bypassing traditional banks. This lending model functions on a 'many to many' basis through online intermediaries, known as lending platforms.

Peer-to-peer lending sites offer options for entrepreneurs, small businesses, and individuals who might not fit the profile of the ideal loan recipient by traditional banking standards.

P2P lending offers opportunities that many traditional lenders won't. Borrowers and investors may benefit from cutting out the middleman of traditional banks.

Risks of P2P Lending

Risk of default: Most P2P lending platforms vet borrowers, but it's always possible to lose money. If a borrower defaults on a loan you funded, it could result in a significant loss. As with most high-return investments, gains are never guaranteed.

Is P2P lending safe? Peer-to-peer lending is riskier than a savings account or certificate of deposit, but the interest rates are much higher. This is because those who invest in a peer-to-peer lending site assume most of the risk that banks or other financial institutions normally assume.

Peer-to-peer (P2P) lending enables individuals to obtain loans directly from other individuals, cutting out the financial institution as the middleman. Websites that facilitate P2P lending have greatly increased their adoption as an alternative method of financing.