• May 11, 2021
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Loans are usually received from a bank. Through the bank a consumer with good, substantiated credit can have access to sums of money that could take decades to gather. However, there are those of us that for whatever reason cannot turn to a bank for a loan.

Peer-to-peer lending or social lending is a financial transaction that takes place directly, between individuals, without the intervention of a traditional financial institution. This lending is intended to benefit the lender and the borrower, while the money is used for purposes such as student loans, mortgages, business financing and even debt consolidation.

Peer-to-peer lending is a product of Internet technology and social networking. The social lending market grew rapidly during the global financial crisis in 2007-2010, where relevant online platforms were able to provide credit when banks and other financial institutions had major cash flow problems. The first social lending company in the UK was ZOPA (https://www.zopa.com) in February 2005. In 2010 the Funding Circle (https://www.fundingcircle.com/uk/) was the first to finance business from individuals. In February 2006, PROSPER (https://www.prosper.com/) was created in the US, while in 2009 ZIDISHA (https://www.zidisha.org/) was the first platform to connect lenders with borrowers on an international basis. The turnover related to social borrowing was more than 5.5 billion dollars after 2010.

Social lending and networks

Disintermediation means the removal of mediators in a transaction and in this case, it concerns traditional financial institutions as it results in a significant reduction of borrowing costs. Unlike the traditional banking system, the lender can choose where they want to lend their funds. On the other hand, the borrower can describe their need for funds and suggest an interest rate that they can and want to pay. The borrower must provide some information regarding their creditworthiness, but also provide information that they consider important, or even answer questions coming from their potential lenders. The interest rate agreement for a borrower is selected through an auction process.

The use of social networks is based on the idea that borrowers find it more difficult to break an agreement with members of their own community. The platforms connect lenders with borrowers based on common characteristics that could either be geographical, educational, professional or social.

Any consumer or investor considering using a peer-to-peer lending site should check their transaction fees first. Each site makes money differently, but charges and commissions may be charged by the lender, the borrower, or both. Like banks, websites may charge loan fees, late fees and dropout fees.

Banking institutions, even after their recapitalization, are not expected to be particularly generous in their credit policy. In a country where business ideas, often coming from young people, are drowned out by lack of cash flow, the operation of social lending could contribute to the creation of investments, even on a small scale. Such a direction, however, needs a flexible and open-minded public sector. The competent ministries and supervisory authorities must take the initiative and legally define such a market that can only benefit the national economy.

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