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There is an old saying: \”There is nothing new under the sun\”, and this may be applied to peer to peer personal loans. In ancient history, before banks were around, money was lent from one individual to another. 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 is the core of person to person, or peer to peer lending, at its absolute basic. Of course, as society grew more sophisticated, institutions were created with the specific idea of lending money to people who needed it, earning a profit on that operation by charging interest on the funds lent. Most of these lending institutions got their money, in turn, from other people in the community who wanted to have a place to put their money and earn interest. The financial institution acted as an \”intermediary\”, taking money from depositors and paying them interest at a certain rate, then lending that money to borrowers at a higher rate. The lending institutions made money paying interest on deposits at a lower rate than the interest they earned on loan.

Today, an old but new phenomenon has resurfaced, where holders of deposit funds are finding it more attractive and profitable to make personal loans directly to the people who need them. Since the \”intermediary\” of a bank is eliminated, some people refer to this concept as disintermediation. Peer to peer loans are successful because they are traded on a marketplace, where individuals who have money they want to invest can be in touch with individuals who need to borrow money. Many times, these sites may be in the form of auctions, where the lender can compete with other lenders for the borrowers they prefer to lend to. 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. With no middle man, a major cost is eliminated, so that the lender can earn a higher rate, and the borrower can pay a lower rate.

Another important advantage of peer to peer personal loans is the mannaer in which the risk of these loans is managed. A lender may structure his investment so that only a small portion of his total investment is lent as a personal loan to each individual borrower. A good example would be a young man who wanted to take out a loan for $1,000 for an engagement ring for his fiance. Many investors on the peer to peer lending site may have $1,000 they are willing to invest. A lender may only lend $100 to this young man\’s romantic endeavor. He may lend another $100 to another individual (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.

Now 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 a lot more lenders bidding for their personal loan business.

When a concept has a sound foundation, it is no surprise that it resurfaces as society faces new challenges, and this is precisely what has happened with peer to peer personal loans.

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