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| Peer-to-Peer Education Loans |  Peer-to-peer loan is an unconventional form of lending which involves unsecured loans between individuals. It includes social lending, person-to-person landing, microloans and microfinance. This kind of loan is contrasting with traditional lending, where a bank or other official financial institution makes lend money to individuals.
There is only little similarity between peer-to-peer lending and microfinance. Micro-credits provide small loans to poor individuals. Peer-to-peer lending enables bigger loans between individuals. Besides, it is possible to combine several small loans from different individuals into a large loan using many-to-one model in place of one-to-one model.
Peer-to-peer loan is still not very popular due to its short-term nature, which usually requires repayment terms with duration from 1 to 3 years. Traditional student’s loans have longer terms ranging from 10 to 30 years.
There are two main types of peer-to-peer lending, which are offered by many on-line agencies and student’s sites:
1. Stranger-to-Stranger. It is also known as person-to-person loan. In this case borrower and lender do not have any relations to each other. There are companies which help you to document this loan, service it and even provide guarantees against default. There are usually minimal credit criteria for this financial aid, but the interest rate is considerably higher, approximately as on private education loans.
2. Family and Friends. It requires only formalized documentation (properly executed promissory note) and the fee is fixed. The interest rate is usually lower than for Stranger-to-Stranger type and is alike the interest on government education loans.
Potential advantages of peer-to-peer loans over private student loans include:
- There is no need for a cosigner.
- The borrower is to make personal argument for why he/she deserves a loan. To get any other loan he should interact with large impersonal lending institutions.
- Peer-to-peer lending secure fixed rates that won’t change over the life of the loan, while most private student loans offer variable rates.
- It is more flexible. The borrower can spend money not only to cover college’s cost of attendance. The money goes directly to the student, not the school.
Consider peer-to-peer loan as an alternative to private student loans. But at first, focus on federal education loans as they are cheaper, more available and have better repayment terms.
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