It is said that “what goes around comes around”, and this couldn’t be more true when it comes to peer to peer personal loans. In the old days, banks and other lending companies did not even exist. If someone needed money to build something or expand a business, they would approach someone who had some money to spare.

It may not have been called it at the time, but this was the origin of peer to peer loans. Of course, as society grew more sophisticated, institutions were created with the specific purpose of lending money to people who needed it, earning a profit on that operation by charging interest on the funds lent.

Many times, these organizations were formed as savings and loans, so that they would receive savings deposits of individuals who wanted to receive a return on money they were not using. Banks or other financial institutions took advantage of this phenomenon by using the deposited funds and lending it to people who needed funds.The difference between what they paid their depositors and what they received from their borrowers became their profit.

The cycle has turned, and many people are now turning to peer to peer personal loans, which eliminate this middle man, making the transaction less expensive for both parties. The official name for this is disinter-mediation, since the intermediary of the bank is now removed.

Peer to peer loans work because they are traded on a marketplace, where individuals who have money they want to invest can be in touch with individuals who need to borrow money. Many times, these sites may take the form of auctions, where the lender can compete with other lenders for the borrowers they want.

Today’s consumer is very attuned to this concept due to marketplace sites such as eBay, but instead of hard goods or e-goods, buyers and sellers are actually dealing in money for sale. With no intermediary, a major cost is eliminated so that the lender can earn a higher rate, and the borrower can pay a lower rate.

Lenders especially like the notion of peer to peer personal loans because of the unique risk arrangement available. Lenders can split the funds they lend (their investment) into many small personal loans to various individuals, which means that each individual may receive his money from a variety of lenders.

Let us say that you would like to borrow $1,000 to buy an engagement ring for your girlfriend. There may be someone on the peer to peer lending site who is looking to lend $1,000. But what will happen is that the lender of $1,000 prefers to only lend $100 to you for your dream purchase. He will find someone else, who is perhaps planning to use his personal loan to consolidate overall debt and lend him $100, and then find someone else who plans on needed repairs to his home and lend him $100, and so on.

Now this investment of $1,000 has been lent to 10 different people, lowering his overall risk, since the chances of all of his borrowers defaulting on their personal loans is very small. The converse benefit for the borrowers is that they have many more lenders bidding for their personal loan business.

When an idea has a sound foundation, it is no surprise that it resurfaces as society faces new challenges, and this is exactly what has happened with peer to peer personal loans.

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