Peer to peer lending has become one of the major areas of growth within the financial industry in the 21st century. Even before the economic meltdown of the first decade of the 21st century the issue of peer to peer financing and underwriting guidelines has been a major area of economic growth that has seen a large growth in this area when compared to lending from traditional banks. The underwriting guidelines for peer to peer lending are generally different and based on a wide variety of issues that differ significantly from those presented by loans generated by banks and credit unions.
To begin understanding the underwriting of peer to peer lending when compared to that offered by banks and credit unions, the issues of peer to peer lending generally include the need to protect a larger number of lenders. The tightening of requirements for underwriting loans from banks and credit unions means specific credit score and history requirements must be met for the loan to be completed. In peer to peer lending the individual borrower has their credit rating measured and given a rating that will eventually be used to provide borrowers a guide to the level of risk involved in adding to the loan fund.
In peer to peer lending, a borrower has their interest rate set during the underwriting process by their credit rating, which is similar to the options offered in traditional lending environments. The borrower themselves must be a legal adult and legal resident of the US to have complete the underwriting process. Once their credit has been evaluated, the individual loan is given a rating of risk, with an interest rate attached and details of the loan and lender published on an Online marketplace.
The use of a risk rating is also used to place the proposed loan in a band that sets both the risk level and interest rate for the borrower and potential lenders. Amongst the published details of the underwritten loan is the interest rate that is used set the rate charged by lenders, individual lenders make their own contributions to the overall fund until the required amount of funding is reached on the marketplace. If complete funding is reached by the borrower, the loan is removed from the marketplace and the underwriting process is completed with details of specific repayments to be made at specific times and dates. Unlike traditional loan underwriting agreements, a peer to peer loan is made between the individual borrower and a group of lenders who receive interest and repayment of the level of funding they propose.