Understanding peer-to-peer or person-to-person loans

							Peer-to-peer loans or person-to-person lending are loans granted directly by individuals to
individuals as private loans while completely or partially eliminating the role of banks and other
traditional financial institutions.

Some of the well known online platforms for these types of loans include Zopa, Prosper and
eLolly. Basically, internet based peer-to-peer loans can be differentiated from those issued on a
family and friends level. A special variant is the award of such loans as small loans or micro
loans to entrepreneurs in the developing world.

The loans are not originated on the basis of deriving profit for the creditor, but to support the
work of the borrower from a charitable perspective. Person-to-person lending models nurture
social components that cannot be found in conventional banking models, at the same time
preserving a balance of diversification.

The online peer-to-peer loan marketplace model enables private lenders to find private
borrowers and vice versa. This model brings borrowers and lenders together using an auction
style process. While also seeking to capitalize on the lack of operating cost synonymous with
online ventures, thus cutting down on infrastructure costs like physical branches.

The family and friends model dispenses loans between borrowers and lenders who know each
other already. Another form of peer-to-peer loan, involves a lending community, in which a
group of people borrow each other money in a rotary fashion.

Peer-to-peer loans are based on the theoretical assumption that improving the existing
interpersonal relationships or other forms of social bonding, promotes fiscal responsibility while
ensuring the repayment rate is kept low.

This lending option enables participants to take charge of the allocation of their funds, contrary
to the conventional bank lending models which syndicate funds and cancel out the actual
owners of the funds from deciding who may borrow the funds, and on what terms

Peer-to-peer loans have also evolved into the micro-credit sector, the micro loans enable the
alleviating of poverty as well as supporting small businesses in developing countries and to
support them financially.

Direct lending involves lending of funds to borrowers on the strength of their credit rating, the
risk of capital and interest for the lender is that the borrower could fail to repay the loan. And to
mitigate this risk lenders tend to invest modest amounts into a great number of loans, thus
reducing the sum of money issued to an individual.

Kiva.org was launched in 2005 as the first micro-credit platform, and the loans can be awarded
to small businesses. Usually this is done through local micro-credit institutions.