Peer-to-peer Banks charge higher interest rates to subprime borrowers

Peer-to-peer (P2P) lending is a method of debt
financing that allows people to borrow and lend money without the use of a bank
or other official financial organization as a middleman. This kind of lending
removed the financial institution from the process, however, it takes more
time, effort, and risk than a regular lending scenario. In a normal scenario,
individuals and small business that need a loan will apply for one through a
bank. Once the bank runs a financial check on the candidate’s credit history,
it will determine whether a loan is allowed. If approved an interest rate is
determined to be charged on the loan. If one is rejected due to bad credit
history, an alternative way of obtaining money is through peer-to-peer lending.

            A
prime borrower is someone who is considered to be a below- average credit risk.
This type of borrower is an ideal candidate to receive a loan. This is because
a prime borrower is more likely to pay loan payments on time and repay the loan
in full. Prime borrowers may not be qualified for the lenders’ advertised
rates. Banks charge higher interest rates to subprime borrowers because of
their low credit rating.  Banks evaluate
the risk then determine the interest rate. This type of loans can make it
difficult for low-income subprime loan borrowers to repay. There are lenders
that will target desperate individuals that will offer loans with hidden loan
terms that the borrower cannot pay.

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            The
sharing economy is peer-to-peer based systems were goods and services are
proved or shared through a community based online platform. The sharing
economies enable people and groups to make money from underused assets.
Physical assets are shared as services. Examples would be Lyft, Uber, and Airbnb.
While these services are great, as they expand it can affect the economy in a
negative. If more drivers sign up with Lyft and Uber, there will be less need
for taxi drivers. Same with Airbnb, people will begin to use that service
instead of rental hotels. This can take away jobs.

            The
banks are not taking advantage of the subprime borrowers as long as they follow
the proper business practice. There is a higher interest rate linked with these
types of loans because the borrower has a poor credit score. Subprime accounts
are held to a higher income obligation. The interest rate is to lock a
financial return for the bank. The subprime loan market makes money available
to people who could not obtain a loan. Subprime loans are specifically for
people who want to pay off other debts. Unsettled debts harm a borrower’s
credit score, so applying for a personal loan to pay off existing debt is
helpful and not damaging. The borrower can work to make payments on the
subprime loan and improve their credit score with on-time payments. The reason
for the subprime loan is to help the applicant with bad credit, however, there
are predatory lending practices from third parties who will take advantage of
people who cannot pay the loans.

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