Quite recently, the Consumer Financial Protection Bureau, a regulatory body that takes care of financial Products and services and their respective claims, have been receiving complaints from consumers regarding loans availed from online peer-to-peer (P2P) lenders. This has raised the question as to the amount of risk associated with borrowing from online lenders. Read on to get more information as to what factors make these P2P loans so risky.
P2P Online Lending – What It Is
It is almost true that borrowing money from traditional financial institutions is a thing of the past. Traditional borrowing, a few years ago, involved sending an application to the bank stating the requirement (supported by the relevant documentation), waiting for the bank authority’s approval and finally walking out with the cash in hand or the amount deposited into your account.
Today’s story is vastly different. There are different funding models that a borrower can make use of. Online P2P lending is a popular option. The reason for its popularity is its simplicity. One has to just go online and fill up an application form. After this process, the borrower’s creditworthiness is assessed and if this is found within acceptable limits, the application is placed in the open marketplace. This allows both individuals and institutions place loan offers to the applicant. The customer can then accept or decline. With customers reporting that they are able to save some money the problem was to identify the risk that was involved with P2P lending.
The Risk Factor
It has been observed that P2P online lending platforms are not the source of the problem or the risk. However, it seems to be the ease with which loans are available that causes the problems. Individuals can now apply for online loans easily and get approvals almost immediately. Whereas most of the genuine online peer to peer lenders investigate well before lending the money, for the borrowers that get paid instantly, it is easy for them to end up spending the same unwisely.
On the part of the lenders, it is advised that they thoroughly before opting for such a loan. If the applicant is looking for a loan to finance a big-ticket item, it pays to think whether they can actually afford the item. It is wise to weigh whether the monthly instalment amount can instead go into a savings or a retirement account. The amount may be used to even pay off existing loans.
Consolidation of Debt
However, there are many individuals who are looking to consolidate their debt using P2P loans. That is, they can take an online P2P loan at a lower rate to close their existing loans and therefore end up paying lower monthly instalments. However, this requires some research to be done at the start and ascertained whether the loan is really worth it. Whereas some of the loans do not allow the borrower to close the loan without a fee, other loans such as business and car loans have prepayment fees. If these amounts are high, then it may not make much sense to avail of the online P2P loan to consolidate loans at hand.
Online P2P lenders also offer student loans. It is very important to realize that student loans these days are available everywhere. But what is ultimately the truth is that the loans are burdensome. Any student that avails of such a P2Ponline student loan emerges as a graduate burdened with a heavy debt. Though P2Ploand can be found easily, it is vital for an applicant to know that government sponsored loans, on the other hand, come with tax deduction benefits, a repayment plan that is based on income and even a possibility of a waiver if a specific number of repayments are done on time. None of these facilities are available with P2P online private loans. However, in the case of existing private loans, availing of an online P2P loan may just make sense.
Other Factors to Consider
If an individual wants to apply for a P2P online loan, it is best to start with checking credit reports. It is a good idea to fix any errors that may be found on these reports. Otherwise, the interest rates may be hiked up. It is also a good idea to do some research prior to applying for the loan. It is worthwhile to find out as to which lender offers a lower rate of interest even if they fall outside the ring of online P2P lenders. Never decide on which loan to pick up by looking at the monthly amount to be paid. The total amount that you are going to repay and the time period of the repayment are the more important factors to be considered. This gives the total cost of the loan.
The terms and conditions of the loan should be clearly understood before applying for the loan. This is done to avoid hidden costs if any. The fees and charges of the lender should not be exorbitant.
The applicant should also be careful to invest the loan amount fruitfully soon after availing of the loan. If the reinvestment is not done quickly enough, the chances that the amount will return higher dividends will be diminished by the factor that interest rates change and may become higher.
It is a good idea to go through reviews and ratings before availing an online P2P loan. You should know what others think about the company that you are going to pick a loan from.