How Can Peer to Peer Lending Works?

It's becoming increasingly difficult to get a loan in these economic times. Even for people with excellent credit ratings, banks and financial institutions will not lend money to them. So how can someone with a low credit score or average credit get even a small loan? Social lending is a growing trend that allows consumers to borrow money from others.

How peer to peer lending works

Each new member can register to become either a lender or borrower in online social lending clubs. Lenders are interested in social lending as an investment method. 

Some sites let lenders choose their interest rates for loans while others require borrowers with low credit ratings to pay high interest rates. Lenders can earn a good return if borrowers pay back their loans.

Today, Borrowers are attracted to the most reliable peer-to-peer lending websites as a quick way to get a loan. However, the annual interest rates at these social lending clubs can be very high, up to 35% for those with poor credit ratings.

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Peer-to-peer lending is a great way to obtain a short-term loan if your credit score is good. Social lending sites have helped to finance nearly half a million dollars worth of loans over the last few years according to Slate Magazine. Their popularity is growing.

Social Lending: The Dangers

Lenders can be exposed to high-interest rates by social lending.  Lenders who spread their investments over several small loans are still able to see decent returns. Less than 0.5% of loans default payment.

Peer-to-peer lending can be less risky than borrowing money through banks. This is because personal contact gives borrowers an incentive to repay their loans. 

If the bank is your neighbor or friend, you have more responsibility in repaying the loan.