How the Economy has Affected the Peer-to-Peer Lending Industry

The peer-to-peer lending industry is one of the most dynamic forms of lending available to consumers. Instead of relying on banks and traditional lenders for money, they can utilize regular people who wish to loan money. The emergence of technology has made peer-to-peer lending easier than it has ever been. With the use of one of the many peer-to-peer lending sites out there, you can find a lender or a borrower in no time. These sites do a fantastic job of matching up applicants with those that have extra money to lend. Although the concept is still growing, it has been affected by a down economy as well as almost everything else. Here is how the economy has affected the peer-to-peer lending industry.

Stricter Criteria

The decision to lend or not lend is always in the hands of the one with the money. Therefore, some lenders have not changed their lending standards much at all. However, the majority of lenders have tightened up on their pocketbooks a bit. They will not just lend to anyone. The peer-to-peer lending site does a good job of checking out the credit of the applicant. They will present a detailed report to the lender so that they can make an educated decision of whether or not to lend. The lenders tend to want a better prepared borrower to handle their money. With all of the people out there defaulting on loans, the peer-to-peer lenders want to be a little more careful. 

Fewer Lenders

With so many people losing their jobs and investment funds, there has been fewer and fewer investors to choose from. When the economy is booming, it tends to create more people that are willing to lend. They have extra money in their pocket and they want to receive a good return on their investment. When the economy is bad, fewer people have extra money to lend to others. Therefore, only a select few people remain lenders during this time. 

Higher Interest Rates

During a down economy, lenders want to receive a higher return on their investment because they have less funds to lend and they want to make more money on the loans that they do provide. Another reason that they charge more for their interest is because they are taking a higher risk. When you loan money in a bad economy, you are taking a risk that the person who gets the money will not be able to repay it. Therefore, the lender seeks to be compensated for the extra risk by charging higher interest for it. High risk means high potential for reward in the investment world and this is no different than anything else. Therefore, if you are trying to borrow money through a peer-to-peer network, be prepared to pay a slightly higher interest rate than normal. 

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