An alternative to loans - your network is a different but faster, cheaper way to borrow money

Peer to peer lending is the process by which two people can directly borrow and lend money to each other. Usually no bank or lender is involved and these two people come into a loan arrangement mutually. But there are lots of platforms out there that currently help facilitate this process of loans between two individuals who do not know each other, by acting as the mediator to help decide the loan terms, interest rates, etc. for such loans based on due diligence done on the borrower.

Now the practice of borrowing and lending between family and friends or people who in some way know each other has been going on for millenia and all around the world, in all communities. We could call this peer to peer lending with family and friends. This alternative loan practice is prevalent because it does come with inherent benefits. Every approach has its pros and cons. But this practice has also become slowly less used since the banking world has made loans more available and when not done with the right framework, it can yield results not helpful to the individuals involved. Let us walk you through what benefits can be availed here relative to the conventional bank loans and what can be done to keep these loans fruitful to both parties involved.

Reduced loan overhead (no application fees, wait times) makes the process of in network lending to friends faster and cheaper, as a borrower.

When a family member approaches another member for a loan, generally the process of asking (or applying for a loan) entails explaining the loan need and negotiating on loan terms. You both go over what the amount is, when it will be paid back and what the interest rates you could charge and pay. This could be done in as little as a half an hour over a phone call or a meal. Either you both agree that this loan is possible or not. You can get clarity or a commitment quickly. And no application fee was involved.

Compare this to a conventional bank loan’s application process. You apply for a loan & submit your documents. At this point, it may take a minimum of 5 days to get the loan approved depending on the size of the loan and everything else being smooth sailing. You also pay a loan application fee that is generally non-refundable if you are not approved for the loan. There might also be loan origination points associated with the loan depending on the type of loan. These overheads are built into the banking system since they are holders of other people’s money and therefore the due diligence is required. But also because banks are money making institutions that are leveraging a fee for providing you with a loan.

Custom Negotiated terms are a huge plus point of family and friends lending for both the lender and borrower.

With a traditional lender and even with a mediated platform, you cannot negotiate interest rates as a borrower with your lender. That part is left to the lender to decide based on your credit history, purpose of loan and other submitted documents. This process is also a little bit undisclosed and therefore not totally transparent to you. When taking a loan from a family or friend, you could propose an interest rate that is lower than what you are getting from a lender, but at the same time, higher than what they would make in their savings account, thus making the idea appealing to them.

Also, the ability to customize your loan duration and your loan repayment dates is a huge plus point. Maybe you want to be able to pay off your loan in 3 years vs. 5 years. You have that ability when directly dealing with a friend or family member for your loan.

Collaterals can be specified in such loan contracts too - you could as an example say that you would be willing to put your car or watch up as collateral for the lender, as a show of guarantee that you do intend to pay back your lender.

As a lender, you are getting to invest in another asset class: people you know.

We have all heard about the various investing strategies and one thing that keeps coming up again and again is diversification of assets you invest in. Equity markets, real estate, treasury bills are all assets to invest in. If a friend or family member has come up to you and you trust their ability to pay you back, and are quite comfortable with their credit history and social credibility in society, you could gain from being a lender to them. You could earn interest from a loan you gave to them and also possibly negotiate sharing in their investment. It is rewarding on many levels to help invest in someone you want to see succeed and get a leg up. This could only help strengthen your relationship and a known asset might just be in your circle to invest in. So the next time a sibling, niece, nephew, friend, aunt, uncle, parent or child comes up to you to loan money, consider them from the point of view of a good investment to see if they make sense as an asset class.

As a borrower, you are helping your interest create a financial advantage for the people within your network.

Interest earned on a loan can add up. If you calculate basic amortizations for a loan, for a loan of $50K paid back over 5 years with an interest of 3.0%, you are in effect paying your lender almost $4K in interest. This gives them a chance at making money as a lender, while getting the chance to earn interest monthly and re-invest it too. Your money is going into your own network and creating advantage for people within your network.

Peer to peer lending between family and friends comes with big advantages as long as it is done right. We recommend you read our blog article on how to work through the nuances of this process and follow the steps and tips we detail to make sure you go through this process correctly with your lender or borrower to make such loans work for you in a positive and fruitful manner.

Disclaimer: Namma is not your legal advisor, tax advisor or lawyer. Our blogs are based on product research done by our team with our customers and our service is meant to make borrowing and lending between family and friends less awkward and more uplifting.