New technologies have had a particularly significant impact on the private finance sector , particularly through digital platforms where peer-to-peer lending is facilitated. This offers users an alternative and different way to access liquidity to meet their essential needs. However, it's not a traditional line of credit; rather, it maintains well-defined guidelines that can make it highly attractive to borrowers.
From these general guidelines on peer-to-peer lending, many new aspects arise from its demand. To begin with, the financing doesn't come from a bank or financial institution. Instead, it comes from an individual acting as a lender , that is, someone who lends you money at a specific time and under conditions previously agreed upon by both parties. The primary objective is to earn a return on their savings by lending money to others. In this way, both parties benefit from the process.
The lender benefits because they obtain a return on their capital that they could not achieve through the main savings products (fixed-term deposits, bank promissory notes, high-yield accounts, or even money market funds), where, at best, they could only approach levels of 2% . Similarly, investment products offer no fixed or guaranteed return and involve a series of risks to the invested capital. This is especially relevant at a time when volatility in the financial markets is one of their main common denominators.
Financing for individuals
While the other party, the loan applicant, would achieve their goal, they would also benefit from more favorable terms. Another characteristic of this new financing product is that it represents the only access route for a segment of the Spanish population. Because of their low salaries, existing debts with their banks, or simply being listed on a credit blacklist (ASNEF, RAI, etc.), they are barred from accessing any kind of credit, even small loans or those with discounts. Indeed, peer-to-peer lending is their last resort when they cannot access conventional credit lines offered by financial institutions.
If an agreement is reached, both parties can benefit from this process. On the one hand, the applicant will obtain a more competitive interest rate than with other options, averaging 6% , and in any case lower than that offered by banks. This represents an average reduction of between two and five percentage points compared to traditional financing. Furthermore, all types of fees and other management and maintenance costs will be avoided, reducing the financial burden of formalizing the agreement.
Benefits for Lenders
On the other hand, lenders will be able to generate a much more satisfactory return on their savings. This starts from the 1% currently offered by banks for fixed-term deposits, promissory notes, or even high-yield savings accounts. In other words, the return on their capital is much more profitable, and perhaps with shorter terms depending on the other party's needs. What interest can be obtained through this strategy? There isn't a fixed return, as it varies in each case and depends entirely on the agreement with the other party involved.
In any case, this type of financing typically ranges from 5% to 9% . However, these limits may be exceeded depending on the agreement reached with the user. Another important aspect is that there are no fees or other administrative costs associated with this type of loan, unlike conventional loans. These include fees for opening, processing, or early repayment, among others.
Reasons for choosing this model
In any case, if you are going to lend money to another person, you will have no choice but to know some of the benefits that this transaction between individuals will bring you. In case at any time you find yourself in the trance of making these monetary movements. Among which are the following benefits that we are going to expose you below:
- You can improve your profitability from very modest amounts that will not suppose you liquidity problems to face the expenses that you will have to face in one or two years.
- You can choose the client that most satisfies you based on its characteristics. In this sense, you have powerful filters to detect which is the best user to lend you money and under what amounts.
- It is an investment strategy that will help you overcome the bad times that the business is going through. money price. Where, at the moment its value is zero, being at 0%, as a consequence of monetary measures by the European Central Bank (ECB).
- You can get a fixed and guaranteed money every year that will help you make the state of your savings account much more buoyant than up to now. In a sense, it is extra money that you did not have when developing your family or personal budget.
Risk of these operations
On the other hand, lending money to an individual is not without risks . For example, they might take longer to repay you or even default on the loan. To avoid these scenarios, it is highly advisable to carry out these transactions through a secure, and above all, reliable platform.
Another drawback of peer-to-peer loans is that the repayment period can be very long. In other words, the repayment terms can be excessively extended, and it can take a long time to get your money back. These loans can sometimes last up to three or four years.
It's also worth mentioning that peer-to-peer lending requires trust in the other party . In other words, you need to know the other person's motivations before lending them money. Even if they're on a defaulters list, you should avoid any kind of relationship with them. Ultimately, you have a lot to lose.
What will the plaintiffs find?
On the contrary, if you are in the position of the one who wants to request a loan, the benefits that you can find are very different. They will have nothing to do with those of the lender and that is why their point of view will be completely different from all perspectives. Even so, these are some of the advantages that the demand for this type of financing will bring.
- You can find the credit that you credit institutions refused and other companies for many reasons. In addition, the requirements to access this special product are not as demanding as in the previous case.
- Financing may come out for you cheaper since it is common for the other party to ask you for an interest rate close to 5% or 6%. In any case, much more competitive than that offered by banks. Without having to pay commissions and other expenses for its concession.
- On the other hand, you have a wide offer where choose your lender. Perhaps with very important differences between them, including the interest rates that they will ask you to formalize the operation. To the point that you must analyze the financing proposals that are proposed to you from now on.
- La opposed With respect to a line of credit subscribed in a bank, it can reach up to 25% or even more in some cases. In this way, you can save some money to provide yourself with liquidity in the coming months or year.
Only if they are necessary
It's a strategy that can be very effective when you urgently need cash in your checking account. This could be due to a debt to someone else, an unexpected expense, or any other circumstance that requires you to have funds available. In this sense, peer-to-peer lending can help you get out of a tight spot at some point in your life.
Finally, it should be noted that this modality in granting loans is only useful for cases of extreme need. You do not have to go to them for no reason since at the end of the day you will have to return it and pay a series of interests. Of course, the utility of loans between individuals is very high, although it also offers more limitations in its granting. Not in vain, you have to counter that with this model your level of debt will increase. As in the credits granted by banks. Don't forget it if you don't want to have a dislike.