Person-to-person guaranteeing

Person-to-Person Guaranteeing (P2P Guaranteeing) is the process by which people are able to facilitate the lending process by providing the guarantee or collateral for a loan to be taken out. In the case of a borrower in such a position that there is insufficient funds for even the loan collateral, banks will not lend because of the inherent riskiness associated with such a loan. Therefore, it would be necessary for the borrower to obtain the funds from outside sources. By engaging in P2P Guaranteeing a third party steps in and provides the necessary risk capital by guaranteeing the loan, thereby reducing the bank's risk and enabling them to make a loan that they would not have otherwise made.

Advantages

Impact

In the P2P Guaranteeing model the impact of every dollar has a doubling effect of sorts. The amount of capital required of person A in order for person B to obtain a loan is less than the full loan amount, as person A is only supplying the collateral to free up the loan rather than the loan itself. Therefore, a $100 loan might require $20 in guarantee capital (20% of the loan amount).

Lower Foreign Exchange Rate Risk

With P2P guaranteeing transactions are done solely in the local currency, between the local bank and the borrower. Money does not exchange hands when one agrees to become a guarantor since a guarantee is only an agreement to take on debt should the borrower default. The only time money crosses borders with P2P guaranteeing is in the event of a default. Therefore, the risk of loss associated with fluctuations in the Foreign exchange rate is greatly diminished.

Lower Interest Rates

Guaranteeing a loan increases confidence that the loan will be repaid and it reduces the risk faced by the bank. As a result of reduced risk the cost to borrowing becomes less, which translates to a lower interest rate charged by the bank to the borrower.

Pioneer

United Prosperity, a California-based non profit is considered to be "the world's first person-to-person loan guaranteeing website".