When people like you and I decide to lend or borrow money to each other, the peer-to-peer loans happen. More commonly referred to as P2P loans, these types of money transactions happen between two individuals (or groups) without the involvement of any authorized financial institution or bank. However, there may be a middleman or a P2P company to facilitate the transaction.
The role of a P2P company is pretty simple. There are borrowers and there are lenders. The company acts as a bridge between the two and brings them together. When the transaction is completed, the company takes some percentage of the total transaction amount. There are many P2P companies these days which are operating online.
The interest amount related to the P2P loans is usually much higher than the normal loans provided by the banks and financial organizations. The interest rate could be as high as 20 percent and even more. Why is the interest rate so high? Well, these transactions are not regulated by the government or the banks. Hence, it is up to the lender to ascertain the interest amount.
Also, these loans are usually taken by the people who do not have a good credit rating. The low credit rating could be the result of many situations. For instance, the defaulters of the other types of loans have low rating. People who have low income are also not able to get the full loan amount they need through the banks. Therefore, they go for the peer-to-peer loans.
Remember one thing; take the peer-to-peer loan only if you have some critical need. Taking any loan is easy but paying it back is definitely not.