Saturday, 29 December 2012

Peer to peer loans, a brief description in bypassing the Banks


Many economists have offered theories about how financial crises develop and how they could be prevented. There is little consensus, however, and financial crises are still a regular occurrence around the world.
When a bank suffers a sudden rush of withdrawals by depositors, this is called a bank run. Since banks lend out most of the cash they receive in deposits (see fractional-reserve banking), it is difficult for them to quickly pay back all deposits if these are suddenly demanded, so a run may leave the bank in bankruptcy, causing many depositors to lose their savings unless they are covered by deposit insurance. A situation in which bank runs are widespread is called a systemic banking crisis or just a banking panic.
Economists say that a financial asset (stock, for example) exhibits a bubble when its price exceeds the present value of the future income (such as interest or dividends) that would be received by owning it to maturity. If most market participants buy the asset primarily in hopes of selling it later at a higher price, instead of buying it for the income it will generate, this could be evidence that a bubble is present. If there is a bubble, there is also a risk of a crash in asset prices. Well-known examples of bubbles and crashes in stock prices and other asset prices include, the Wall Street Crash of 1929, the crash of the dot-com bubble in 2000–2001, and the now-deflating United States housing bubble.
An especially prolonged recession may be called a depression, while a long period of slow but not necessarily negative growth is sometimes called economic stagnation. Since these phenomena affect much more than the financial system they are not usually considered financial crises as such though there are links between the two.
A quarterly survey of commercial banks by the European Central Bank showed a surge in the number of institutions that were becoming more restrictive about who they lent to, because the banks themselves were having trouble raising money and were under pressure from regulators to reduce risk.
In the last couple of years, the lending industry has gone through an evolution and has given way to social lending as the new and promising mode of lending. Also known as peer- to- peer lending or person to person (P2P) lending. The main objective of the social lending hubs is to offer an online loan with the best interest rates and to make customers feel like they are borrowing from a friend or community. This peer to peer borrowing is increasingly being seen in a new light and is being considered as a part of community borrowing (which was more traditionally offered by small local community banks).
Peer-to-peer lenders offer a narrower range of services than traditional banks, and in some jurisdictions may not be required to have a banking license. Peer-to-peer loans, are funded by investors who can choose the loans they fund; sometimes as many as several hundred investors fund one loan; banks, on the other hand, fund loans with money from multiple depositors or money that they have borrowed from other sources; the depositors are not able to choose which loans to fund.. Because of these differences, peer-to-peer lenders are considered non-banking financial companies.

One of the main advantages of person-to-person lending for borrowers has been better rates than traditional bank rates can offer (often below 10%.) The advantages for lenders are higher returns than obtainable from a savings account or other investments. Both of these benefits are the result of disintermediation, since peer-to-peer lenders avoid the costs of physical branches, capital reserves, and high overhead costs borne by traditional financial institutions with many employees and costly locations.
Peer-to-peer lending also attracts borrowers who, because of their credit status or the lack of thereof, are unqualified for traditional bank loans. Because past behavior is frequently indicative of future performance and low credit scores correlate with high likelihood of default, peer-to-peer intermediaries have started to decline a large number of applicants and charge higher interest rates to riskier borrowers that are approved. Some broker companies are also instituting funds into which each borrower makes a contribution and from which lenders are recompensed if a borrower is unable to pay back the loan.
Because, unlike depositing money in banks, peer-to-peer lenders can choose themselves whether to lend their money to safer borrowers with lower interest rates or to riskier borrowers with higher returns, peer-to-peer lending is treated legally as investment and the repayment in case of borrower defaulting is not guaranteed by the government. But despite a certain risk for lenders peer to peer loans have been a growing trend since 2005 by Zopa. Avoiding the bad reputation of loans or loan sharks, the peer to peer business model has the simple idea of joining borrower and lending community. Without the securities of a central bank, it also avoids the problems of which banks seem to have caused. While other concepts like crowd funding allowing fans or donations from well meaning people to fund small start up companies to create an industry. Financial institutions don't appear to invest for future unless there are certain guarantees. As the public become discontented with financial scandals and continuing global money worries, its likely that the public will turn to peer to peer investment and loans. The future of creativity and innovation might relay on it, as more and people are turning to this type of banking. Time will tell if this is a sound alternative to savings and loans or if indeed it is another Bubble...

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