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What Is Peer-to-Peer Microlending, and What Are Its Benefits?

By Eduardo Monroy | October 25, 2021

Many financial solutions are available to individuals, small business owners, and investors, but most of them involve painstakingly long and complex formalities. On the other hand, peer-to-peer microlending is a more easily accessible option available to borrowers and lenders. In recent years, microlending has become quite popular for all the right reasons, which you can find out by reading further.

What is peer-to-peer (P2P) microlending?

Peer-to-peer microlending involves direct money lending to individuals and small business owners where official financial institutions are not involved as mediators. P2P microlending is usually done through online platforms that help lenders and borrowers connect. 

It is deemed a convenient alternative since microlending is much different in characteristics compared to traditional financing methods. 

Unlike other bank loans, microloans come with unique terms and conditions. For example, the Small Business Administration (SBA) in the United States runs a microloan program designed to help veterans, women, and individuals under low-income or minority groups so that they can get access to capital, supplies, and necessary equipment.

How does P2P micro-lending work?

Everything is pretty straightforward when it comes to P2P microlending. The transactions are carried out through an authorized online platform. 

Here’s how it works: 

  1. A borrower completes an online application through a P2P microlending platform to obtain a loan.
  2. The platform assesses the loan application to determine the risk and the credit rating of the applicant. 
  3. The applicant is assigned an appropriate interest rate.
  4. Once the application is approved, the applicant receives offers from investors interested in lending money based on their FICO credit rating and the assigned interest rate. 
  5. The applicant gets to evaluate and choose the offer they want to go with.
  6. The applicant’s responsibility is to make monthly interest payments and pay off the principal amount at maturity.

The benefits of peer-to-peer microlending for borrowers.

The ease of applying.

You can apply for a loan anytime from anywhere. You don’t require physically go to a bank to complete any formalities. Also, the process is relatively seamless and easy for the applicant because not as many documents are required when applying for a P2P microloan through a platform.

Faster approvals.

These types of loans are especially ideal for emergencies, and the best part is that they get approved quickly. For example, peer-to-peer microloans amounting to $5000 or less usually get funded in under a week.

Relaxed eligibility criteria.

The eligibility criteria for peer-to-peer microlending are much more relaxed as compared to the traditional forms of lending.

Higher funding rates.

The funding amounts for P2P microlending have risen over time, offering a great opportunity for borrowers to get support for more meaningful projects.

Benefits of peer-to-peer microlending for lenders.

Diversified risk.

With peer-to-peer microlending, lenders get a majority of their loans compensated in smaller amounts. As a result, P2P microfinancing is an attractive alternative for lenders compared to the paltry interest rates they get from traditional banks. Peer-to-peer microlending is also an excellent alternative to the stock market. 

High returns on investments (ROI).

P2P microlending can be a source of passive income for many lenders. The current return rate is close to 10% depending on the loan type and the term you choose. This attractive return rate of 10% can be very beneficial given the investment is diversified into large pools of verified and pre-qualified borrowers.

You get to choose.

Lenders get the upper hand to choose to whom they lend money. So you can avoid those borrowers consolidating credit card debt.

Who uses peer-to-peer microlending? 

P2P microlending helps individuals and owners of small businesses with low credit histories secure microloans for growth and expansion.

  • Students
  • Professionals
  • Small cafes and restaurants
  • Private legal firms
  • Medspas 
  • Home improvement and construction agencies
  • Private medical practitioners like dentists, chiropractors, and more.

Final thoughts.

Peer-to-peer lending is not a new concept and has existed for quite some time now. However, over the last half-decade, this model of micro-financing has been benefitting both borrowers and lenders.

With stiffened regulations in the traditional lending markets and the declining economy, P2P microlending has survived and thrived. 

Borrowers must remember that the most credit-worthy applicants typically qualify quickly for the best interest rates and lowest terms. So, if you try to improve your credit rate, it can work in your favor.

Whether you are an investor looking to diversify your lending portfolio in the market or you’re someone who is seeking quick loans, Lendee can help you right away. 

This peer-to-peer microlending platform can guide you toward the most profitable returns and help you choose the offer that best fits your requirements.

Download the Lendee app today and create your free account to get started.