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What Is Microlending, and How Does It Work?

By Nicolette Norris | October 22, 2021

It’s almost the first of the month, but you went a little too hard this past weekend. And now you’re short on rent.

And your family and friends are tired of you bugging them for cash.

But what if you could borrow money from…strangers?

It turns out, you actually can, and it’s not as strange as it sounds.

Peer-to-peer lending (P2P lending) is the process of loaning money to new businesses or individuals, typically done through an online platform that matches investors and borrowers together.

Microlending, while similar to P2P lending, is the process of loaning small amounts of money, usually to business startups in developing countries.

The premise is that lenders invest in a new business, and upon the success of the business, investors are paid back with low-interest rates.

That means, whether you are simply in need of a little cash or looking to start a whole business, microlending and P2P lending are options available to you.

Like all forms of lending, however, there is a level of risk involved for the investor. Microloans have general default rates of 10-20%, and P2P lending has a default rate that ranges between 4-5%.

Despite the risk, choosing to invest in a startup or to help an individual can provide opportunities to which they may not normally have access.

How does it work?

Generally, in microlending and P2P lending, a third-party service is used to match investors or lenders with borrowers. In most instances, an interest rate is set by the investor (and in some instances, an additional fee is charged by the third-party servicer).

Borrowers are then given a specified time frame to repay the full amount, including interest. Penalties exist for borrowers who are unable to repay the full amount, as it could be reported to the credit bureaus, which would hurt their credit score.

P2P lending is advantageous for borrowers and investors because it eliminates the need for a financial institution (like a bank) that could otherwise halt or slow the processing and transferring of funds.

Benefits of microlending for borrowers.

Borrowers benefit from a P2P lending agreement because they are able to get the funds that they need when they need them the most. Borrowers often do not have access to traditional financing as a result of where they are located or resource availability.

Microlending provides a way for borrowers to obtain the funds that they need, whether for a startup business or other reasons, and in such agreements, they are required to pay the full amount back with interest.

The risk of accepting a loan from the borrower’s perspective is that he or she will suffer penalties if the loan is not repaid in full. Most often, it would lower his or her credit score, as his or her credit report would reflect that the loan in question was not repaid.

Benefits of microlending for investors.

Investors or lenders benefit from a microlending agreement because they are able to lend a certain amount of money to an individual, but earn it back with even more money than they started with.

Compared to stocks or other investments, this can be seen as a more guaranteed return because the interest that you get back is guaranteed.

Like all forms of investment, however, there still exists a risk of not being paid back in full. It helps to review, when possible, the profile of the borrower so that investors can gauge the likelihood of whether they will get their invested money back.

A service that serves everyone.

Regardless of whether you need funds or have the funds to give, microlending and P2P lending are transforming the financial landscape.

Lendee is a Peer to Peer micro-lending platform that creates an easy-to-use network of microloans for the borrowers who need them. Sometimes it’s challenging to get that extra $1,000 (and maybe you’re tired of bugging your friends).

With Lendee, borrowers can post their funding requests for investors to review, set their terms, and sign. The terms are clear-cut, straightforward, and easy to understand so that there is no confusion.

Investors can also rely on a more guaranteed return, as they are able to see the general profile of those to whom they loan funds.

Then that same $1,000 that was used to help person A can be used to invest in person B while earning even more than the initial investment. The possibilities are truly endless.

Give Lendee a try today.