What does peer-to-peer lending involve?

Peer-to-peer lending refers to a direct borrowing and lending arrangement between individuals without the involvement of traditional financial institutions such as banks. In this model, individuals (borrowers) can connect with other individuals (lenders) through an online platform that facilitates the loan process. Borrowers benefit from potentially lower interest rates, while lenders can earn interest on the funds they provide to borrowers.

The structure emphasizes a more democratic approach to lending, where individual creditworthiness is assessed through various criteria, and lenders have the flexibility to decide whom they wish to lend to based on their risk appetite. This method eliminates intermediaries, reducing costs and streamlining the borrowing process.

In contrast, options involving borrowing through banks and financial institutions, investment in government securities, or mutual funds do not represent the fundamental concept of peer-to-peer lending, as they involve established financial entities or investment vehicles rather than direct transactions between private individuals.