Person-to-person lending or peer-to-peer lending, abbreviated frequently as P2P lending, is a type of financial transaction which takes place directly between individuals or "peers" without going through a traditional financial institution, like a bank. P2P lending is for the most part a for-profit activity, there is interest charged so those offering the loan will make money off of the money they lent.
This differentiates from person-to-person charities, person-to-person philanthropy and crowd funding which create connections between donors and recipients of donations but the contributions do not charge interest or make a profit.
First some background on payday loans. A payday loan is a short-term, small dollar loan. Borrowers take out the loan and agree to pay it back on their next payday, usually in 14 days. They also have to pay a flat fee for use of the loan. Those fees can vary between lenders but a typical cost for a $100 loan in many states is $15.
You'll see that if borrowers pay $15 for a $100 payday loan they are in effect paying only 15% in interest. That amounts to a perfectly reasonable rate. So how did critics of payday lending arrive at the astronomical rate they cite? To get there they have to apply the annual percentage rate, or APR, to the loan, which produces a much different rate than what the customer actually paid.
The first person-to-person lending company to launch was Zopa in the United Kingdom, in 2005. Zopa is considered a big fish in the P2P market and makes up about 2% of the unsecured personal loan market in the UK. The site allows you choose the type of borrower, the level of risk you are prepared to take on, and the interest rate you wish to receive.
But when the APR is applied to a short-term loan, like a payday loan, it presents a distorted picture of the interest a borrower is really paying. The APR is calculated by multiplying the installment total by the number of payment periods in a year. So to get the APR for a payday loan of $100 loan we multiply 15 (the fee) times 26 (the number of two-week periods in a year), giving us an interest rate of 390%.
Talking to private lenders who focus their business on bad credit personal loans will help you to determine which will have the most attractive interest rate. However, it will be important to research the companies you are considering and make sure that they are reputable and do not have any consumer actions pending.
The number of times a borrowers can extend payday loans is heavily regulated in all states. Some states won't allow a loan to be extended even one time. And in states that do permit extensions, the number of times it can be done is limited. This is why using figures like the 700% number don't give an accurate picture of the conditions that prevail in the payday lending industry and such tactics don't serve to encourage constructive debate on how to extend credit to underserved communities.
This differentiates from person-to-person charities, person-to-person philanthropy and crowd funding which create connections between donors and recipients of donations but the contributions do not charge interest or make a profit.
First some background on payday loans. A payday loan is a short-term, small dollar loan. Borrowers take out the loan and agree to pay it back on their next payday, usually in 14 days. They also have to pay a flat fee for use of the loan. Those fees can vary between lenders but a typical cost for a $100 loan in many states is $15.
You'll see that if borrowers pay $15 for a $100 payday loan they are in effect paying only 15% in interest. That amounts to a perfectly reasonable rate. So how did critics of payday lending arrive at the astronomical rate they cite? To get there they have to apply the annual percentage rate, or APR, to the loan, which produces a much different rate than what the customer actually paid.
The first person-to-person lending company to launch was Zopa in the United Kingdom, in 2005. Zopa is considered a big fish in the P2P market and makes up about 2% of the unsecured personal loan market in the UK. The site allows you choose the type of borrower, the level of risk you are prepared to take on, and the interest rate you wish to receive.
But when the APR is applied to a short-term loan, like a payday loan, it presents a distorted picture of the interest a borrower is really paying. The APR is calculated by multiplying the installment total by the number of payment periods in a year. So to get the APR for a payday loan of $100 loan we multiply 15 (the fee) times 26 (the number of two-week periods in a year), giving us an interest rate of 390%.
Talking to private lenders who focus their business on bad credit personal loans will help you to determine which will have the most attractive interest rate. However, it will be important to research the companies you are considering and make sure that they are reputable and do not have any consumer actions pending.
The number of times a borrowers can extend payday loans is heavily regulated in all states. Some states won't allow a loan to be extended even one time. And in states that do permit extensions, the number of times it can be done is limited. This is why using figures like the 700% number don't give an accurate picture of the conditions that prevail in the payday lending industry and such tactics don't serve to encourage constructive debate on how to extend credit to underserved communities.
About the Author:
Harris Smith offers advice on home equity line of credit and obtaining credit. Debt Consolidation provides nationwide debt management services for those who are struggling with moderate to severe debt issues.
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