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The concept of P2P lending is quite simple. It’s similar to filling up a loan request in your local bank when you need money. Your credit score would be assessed and your financial institution would accept or deny your application and tell you about the applicable rate of interest for your loan.
Peer-to-peer lending works on the similar principle except for the fact that it doesn’t involve bank in the process. Technically, two lending sites receive requests from borrowers and allot a credit rating and interest ratio on the same assumptions used by the financial institution. Investors, on the other hand, go through different lending sites to review requests and invest in the money-lending process.
When a credit land up at the solicited amount, the credit is deposited into the borrower’s account. You would require to make payments to the lending website and it then forwards those payments to the investor’s account.
Risk-reward ratio is certainly one of the most important considerations for every investment decision including peer-to-peer lending. However, with P2P platforms, it is comparatively easier to envision the rewards. The problem, however, relates to examining the risk levels acceptable to the rate of returns.
In this post, we’ll have a look at 5 of the deadliest peer-to-peer lending pit holes that borrowers often fall into:
- Not Giving Time to Your Credit Score
As obtaining a P2P loan is a no brainer these days, a lot of borrowers quickly fill out an application form. Their application gets approved along with an interest rate that they need to pay for several years. In fact, the whole process takes not more than a week.
Similar to any other loan, the interest ratio of your loan will be evaluated on the basis of your credit score. Notably, if you’re not looking forward to acquiring the loan on an immediate basis, you can improve your credit score and reduce the interest rate on your loan.
While it might take a couple of months to shape up your credit score, fixing it could save a lot in interest payments.
- Platform Selection
This is another important aspect that needs your consideration while borrowing money from the P2P lending sites. According to Nesta, the possible crash of one or more peer-to-peer platforms due to misconduct and negligence was the primary threat to the expansion of the investment sector. In an attempt to alleviate platform scams, FCA imposes that peer-to-peer platforms must keep the client’s money in separated accounts.
Being a borrower, it’s your responsibility to go through neutral online comparisons and peer-to-peer lending sites review portals to make an informed decision.
- Follow Poor Debt Habits
The primary risk for most borrowers is that they misuse their peer funds to follow poor debt habits. If you continuously spend more than your income, then you would eventually face trouble no matter how much credit you acquire in the shape of loans.
If you’re taking P2P loans just to pay off your credit card debts, you need to consider your spending habits right now. Keep in mind, P2P lending cannot be a savior if you have a mismanaged spending schedule.
At this point, a lot of borrowers try to make a spending budget, which is obviously a great step but then actually few follow it. Besides preparing a reasonable budget, you can also ask for counselling from your friends and family.
- Liquidity Threats
Investors are lawfully bound to lend money to borrowers over the conditions of the loan. This is why lending is believed to be an illiquid phenomenon. Contingent upon the peer-to-peer platform, the loan commitments can be further traded on a secondary market. Usually, the bigger the P2P platform, the more usable the secondary market is.
- Considering Peer Loans as Easy Money
The convenience of acquiring a peer-to-peer credit doesn’t mean it is in any way different from other loan types. As a matter of fact, non-payment on a P2P loan will shut the door to any further loan taking opportunity.
Mitigating the above-listed threats in P2P lending is same as curtailing the risks in any other loan type. The investment and lending industry is booming, making it possible for the borrowers to attain personal loans or business loans. Understanding you receive the best interest ratio and consuming funds the right way will go a long way to achieving your long-term financial objectives. Used appropriately and you’ll have a permanent source for all your credit requirements.
There you have it. There is no denying the fact that getting loans in today’s dynamic financial market is easier than ever before. But, if you’re not able to avoid the aforementioned risks at the right time, you would probably get yourself in a trouble.