Peer-to-peer (P2P) lending, which is also known as social lending, allows individuals to lend and borrow money directly to one another. Just as eBay removed middlemen between buyers and sellers, P2P lending companies like Neo finance eliminate financial intermediaries such as banks and credit unions.
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P2P lending improves outcomes for individuals who offer capital and reduce interest rates for those who use it, but it requires more time and effort from them and includes more risk.
The basics of social loans
- P2P lending is a product of important business, technology, and social trends, including:
- A new generation of ‘freeformers’ who combines freedom with social activism. Freeformers want to take control of their work and leisure. Instead of working for one company for 35 years, they prefer to collaborate within the network for a short period on a variety of projects.
- Deployment of web technologies, which foster mass collaboration. New tools enable people to work together online in large groups to achieve common goals (eBay and social networking sites such as Facebook are examples).
- Dis-intermediation of everything. Technological change, globalization, and other international trends continue to reduce the number, size, and the role of business intermediates in various industrial sectors.
- The development of micro-loans to individuals with few assets in developing countries. Loan entities and social community-minded, such as credit unions, have been around for a long time. But microlending gave impetus to the idea of social objectives to make small loans to individuals.