Generally speaking, there are two kinds of loans that can be borrowers can request -- secured loans and unsecured loans. Secured loans are loans that are backed by collateral, that is, loans that are backed by tangible, valuable assets. With secured loans, if the borrower defaults on his or her payments, the lender is entitled to whatever assets the borrower put up as safety or collateral. (Any number of assets can count as collateral, including cars, land, and precious artifacts.) Unsecured loans, on the other hand, are not based on placing any sort of valuable asset as collateral. Rather, they are based almost entirely on a borrower’s credit rating -- a statistically derived number that is supposed to indicate the likelihood that a borrower will default on his or her loan. (Or, by the same token, the likelihood that the borrower will make his or her loan payments on time.) Personal loans usually fall into the latter category. Hence, with unsecured personal loans, it is normally the borrower’s individual responsibility to make his or her payments on time and in full.
Since personal loans depend so heavily on the borrower’s credit score, it is no surprise that such loans are difficult to obtain. This is especially true for undergraduate and graduate students who, simply put, have not had the time to build their personal credit history. When personal loans are made available to borrowers who, for one reason or another, do not possess pristine credit ratings, these loans are traditionally have higher interest rates and issued at lower amounts. In fact, many students applying for personal loans are asked to recruit cosigners (usually a parent or another relative) to vouch for the loan, stepping in and completing the loan payments in case the student defaults on the loan.
Higher interest rates, lower loan amount, stricter repayment terms -- these are the conditions many student borrowers face when applying for loans that are granted based on credit ratings. At People Capital, though, we think there’s a better way of lending and borrowing loans -- the peer-to-peer (p2p) way. With p2p loans, traditional lenders, including those large and impersonal financial institutions, are not the only source of personal loan funding. Individual investors, philanthropic or affinity groups, even friends or family members can potentially qualify as lenders. More importantly, in p2p, a borrower’s credit rating is not the supreme criterion of loan eligibility. To determine a borrower’s creditworthiness, People Capital has developed the Human Capital Score™, a data-driven method that produces a powerful and truly insightful individual risk analysis.
To learn more about how peer lending works, click here.