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Examining Peer-to-Peer Loans as Student Financial Aid

An Introduction to Person-to-Person Lending

Person-to-person lending, today popular abbreviated as P2P lending or also known as peer-to-peer lending and social lending is a type of monetary transaction, in the first place borrowing and lending, which happens directly between individuals without involvement of conventional financial body.

Traditional student loans like federal and private student loans as well as other types of financial aid to students have a long-term nature of 10 to 30 years and the reason why person-to-person lending has become popular over last years is their short-term nature: peer-to-peer loans in general involve short repayment terms from 1 to 3 years. Nowadays lots of different person-to-person lending models can be found. Moreover, there are a large number of peer-to-peer lending sites today with centre of attention on student loans such as GreenNote, Lending Club and Fynanz. These person-to-person lending sites offer diverse services like following:

  • Matching borrowers and lenders
  • Managing all the required loan documentation
  • Servicing the loan which consists of gathering of payments and reporting the payments to credit reporting agencies
  • Providing a guarantee against failure to pay the loan.
  • Typically these sites bare minimum credit conditions, but interest rates tend to be higher.

Things to be Considered Before Applying for Peer-to-Peer Loan

If you are searching for financial aid to invest in pursuing for your academic and career aspirations, we strongly recommend focusing on federal loans first, due to the fact that there are lots of them available, they are cheaper and offer better repayment terms and conditions. If you do not qualify for one of the federal student loan programs, you can apply for private student loans or peer-to-peer loan.

Person-to-person lending has some advantages over private student loans. In the first place, you don’t need a cosigner, which is the case with the private loan plan. If you cannot attain a private student loan because you don’t have a cosigner, peer-to-peer loans can be the best choice for you. Secondly, person-to-person lending has fixed interest rates which don’t change over the length of the loan. Furthermore, peer-to-peer lending is more personal and you don’t have to get yourself involved with large lending institutions and companies. According to some peer-to-peer lending proponents, the personal relationship between lender and borrower leads to lower default rates and more efficient repayment. Besides, this lending plan allows lower credit scores. Finally, peer-to-peer loans are more flexible and the loan funds go directly to the student, not to school.

On the other hand, some disadvantages of peer-to-peer loans lay in the fact that they may offer conditions that are not the best choice for education financial aid, in the first place a shorter repayment terms and the lack of an in-school deferment. Additionally, they don’t cover all academic expenses. Also, some opponents argue that personal lender-borrower connection may lead to higher delinquency and default rates than other student loans.

Requirements for the Borrowers

Peer-to-peer lending sites may ask borrowers to provide some information on reasons for borrowing the money and degree program they attend, year in the school and name of the college or university.

Person-to-Person Lending Models

Direct Lending

Under this model, the lender lends funds to one particular borrower based on her/his credit rating. The main drawback of this model is the capital and interest risk that the borrower could default on the loan, which can be minimized by lending small amounts of money to numerous borrowers.

Indirect Lending

In this model the lender gives money to great number of borrowers which reduces noticeably capital and interest risk of the lender.

Secured Lending

In this lending model, the lender lends money against the strength of the guarantee given by the borrower.

Unsecured Lending

The lender gives funds to the borrower based on the credit score of the borrower. The lender takes the risk of the capital and interest in case of borrower’s default of the loan.

Note: Person-to-person loans between family members are not considered eligible education loans.

Peer-to-Peer lending may be helpful way of investing in your professional future, nonetheless, you should take into consideration all the other types of student financial aid alike and then make decision on which one meets your academic needs the best.

 

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