How safe is peer-to-peer lending?

Having tired of getting loans from banks and the high-interest rate they charge, people are now looking for alternatives. In this age of technology, finding alternatives isn't much of a surprise. Peer-to-peer lending, where, the public offer loans to individuals has already become a phenomenon. Multiple peer-to-peer lending websites are cropping up, connecting the borrowers with the investors. 

What is peer-to-peer lending?

As already mentioned, it is the public which gives loans to the public. The medium that connects each other is a website, an online platform. After the financial crisis that hit most nations, banks have cut down their credit or have been charging higher interest. It was exactly when peer-to-peer lending has seen a rise. The reason why peer-to-peer lending has caught the fancy of people is that, unlike in the traditional methods of lending and borrowing, it provides higher returns for investors. Moreover, the borrowers can borrow at a lesser interest rate. The online platforms help investors earn an interest of up to 6 percentage. 

Risks associated with peer-to-peer lending

The surety that the borrowed money will be repaid is not certain. The reason being that the websites aren't covered under the Financial Services Compensation Scheme. That said, the default rates would be comparatively of a higher percentage. Also, while the government-backed loans are insured, the loans on such platforms aren't so. 

However, the government of the United States has taken steps to regulate this new found way of lending and borrowing. The websites that deal with such lending and borrowing business have to henceforth secure the loans through SEC registration. 

Minimizing the risk

On their part, the websites, too, have simplified the process. They do the process of bookkeeping,  transferring the funds, so the investor or lender will be freed from the hassles. 

Paying heed to expert advice can also be helpful to lenders. Why put all eggs in one basket? Experts call for diversifying the investments, especially for newbies who aren't much aware of how the system of peer-to-peer lending works. 

Another major risk mitigating factor is conducting background verification of borrowers by the websites. Doing so will be helpful to lenders as well as the websites that act as a medium between the lenders and borrowers. 

Final words

Many websites that act as a financial medium are cropping up. One such website can be created using a peer-to-peer lending software. The software can be helpful to aspiring entrepreneurs who wish to take advantage of the booming online business of running a platform, catering to the needs of investors and borrowers.