Personal loans

As much as this old world of ours changes, there are some concepts that work so well they keep returning, and peer to peer personal loans may be one of them. Eons ago, before the development of formal trade and commerce, there were no banks or other lending institutions. Based on who needed the money, and who had a bit of money they were willing to lend out, lenders and borrowers usually located each other in an informal marketplace. This was the basics of person to person, or peer to peer loan. As our society and its institutions became increasingly formalized, specific businesses were set up for the main purpose of lending funds in exchange for the payment of interest. Frequently, these businesses did not use their own funds, but took deposits from people in the area who wanted to earn some return on their excess cash. Banks or other financial institutions took advantage of this by using the deposited money and lending it to people who needed funds. The lending establishments made money paying interest on deposits at a lower rate than the interest they received on loan.

Today, an old but new phenomenon has come back, where holders of deposit funds are finding it more attractive and lucrative to make personal loans directly to the people who need them. Since the "intermediary" of a bank is now gone, some people refer to this concept as disintermediation. Today's peer to peer personal loans are not limited to those in the same locale, since they can be administered on an online marketplace, where those in need of funds can be matched with those who are willing to lend. Many times, these sites may take the form of auctions, where the lender can compete with other lenders for the borrowers they want. The site connects the lenders and the borrowers in an auction process, very much like Ebay for goods, where the lenders compete with each other to provide the lowest rate to borrowers, and borrowers compete with one another to obtain the best rate for their personal loans. Both parties have an advantage by eliminating the middle man.

One of the greatest benefits of peer to peer personal loans is how they change the risk scenario for lenders. A lender may design his investment so that only a small portion of his total investment is given as a personal loan to each individual borrower. Imagine that you, as a borrower, needed to get a personal loan of $1,000 for an engagement ring. Many investors on the peer to peer lending site may have $1,000 they are willing to invest. A lender might only lend $100 to this young man's romantic endeavor. He may lend another $100 to someone else (who is borrowing $1,000 in total) to consolidate his debt, and another $100 to someone else for home repairs, and on and on for various kinds of personal loans. See at flickr post and determine what kind of loan he wanted.

In this way, the risk of the $1,000 lent is spread out over 10 different individuals, making the risk much lower for the lender, and therefore allowing him to keep his rate more reasonable, since interest rates are primarily determined by the risk involved. The other side of the story is that the borrower has such a wide field of lenders that his chances are greatly increased of getting that personal loan in the first place.

That this concept of direct personal loans from one person to another has been reborn is nosurprise, since parties on both sides of the transaction benefit greatly. It can be use for engagement ring financing.