How To Use Peer To Peer Personal Loans - By: Stephanie S. Keenan

As much as this modern world changes, there are some concepts that work so well they keep returning, and peer to peer personal loans may be one of them. In ancient times, before banks were invented, money was lent from one individual to another. People who were in the need of funds could usually find the person in the area who had excess funds to lend out. This was the original 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. Most of these lending institutions got their funds, in turn, from other people in the community who wanted to have a place to put their money and earn interest. Banks or other financial institutions took advantage of this phenomenon by using the deposited funds 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 earned on loan.

The cycle has turned, and many people are now turning to peer to peer personal loans, which eliminate this middle entity, making the transaction less expensive for both parties. Eliminating this middle man, or intermediary, is called 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. Often these marketplaces are established as auction sites, where the site can take on the responsibility of matching, credit checking and processing. Today's consumer is very attunedto this concept due to marketplace sites such as Ebay, but instead of hard goods or e-goods, buyers and sellers are really dealing in money for sale. When the financial institutions are taken out of the picture, so is their profit, and that difference is split into savings for the borrower, and increased profit for the lender.

One of the greatest advantages of peer to peer personal loans is how they change the risk scenario for investors. 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 obtain a personal loan of $1,000 for an engagement ring. Many investors on the peer to peer lending site would have $1,000 they are interested in investing. A lender may 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 needed housing repairs, and on and on for various kinds of personal loans.

At this point, this investment of $1,000 has been lent to 10 different people, lowering his overall risk, since the chances of all of his borrowers defaulting no their personal loans is very small. The converse advantage for the borrowers is that they have many more lenders bidding for their personal loan business.

This "old but new" solution of peer to peer personal loans turns out to be a win-win situation for all the parties involved.

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. Hundreds of years ago, before the development of formal trade and commerce, there existed no banks or other lending institutions. If someone required money to build something or expand a business, he would approach someone who he knew had some money to spare. This was the original 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 desired to earn some return on their excess cash. In turn, these funds would be used to fund the loans to other individuals who were in need of money, in what would now be considered a personal loan. The lending institutions made money paying interest on deposits at a lower rate than the interest they earned on loan.

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