How do peer-to-peer loans work?
A peer-to-peer loan is the same as any other unsecured personal loan. The only difference is that you are borrowing the money from an individual or group of individuals rather than from a financial institution such as a bank.
Peer-to-peer lending websites can therefore be thought of rather like matchmakers, pairing up people who want to earn a return on their money, with those who want to borrow it – and at a rate they both agree on.
The basic concept is that individuals prepared to take on potentially more risk with their cash achieve a higher return by lending to borrowers with lower credit scores, while those looking for security will lend to people with excellent credit ratings who are very unlikely to miss a payment.
This means that, just like loans from more traditional lenders, the interest rate you are offered will depend on your credit score.
There will be charges when you borrow through a peer-to-peer lending website, which will depend on your credit history, how much you want to borrow and over what timeframe. However, they will typically be factored into the interest rate you are offered.
How can you borrow money via a peer-to-peer lender?
Peer-to-peer lenders only offer their loans via the internet. They do not have branches so you won’t be able to make your loan application in person.
You will need to tell the peer-to-peer lender how much you want to borrow and over how long, as well as answer a few questions about your personal circumstances.
MoneySuperMarket lists some of the top mainstream personal loans, as well as peer-to-peer borrowing, so that you can compare the two and make a valued judgement. Don’t assume that one or the other will be cheaper; the low interest rates at the moment mean that traditional lenders are also offering competitive loans.
What are the benefits?
Memories of the credit crunch, coupled with the tough economic climate, have made banks and building societies less eager to lend over the last few years.
Some borrowers have therefore found peer-to-peer lenders more receptive to their needs – even though they will be subject to similar credit checks.
For most borrowers, however, the main advantage of peer-to-peer loans is that they can often offer lower interest rates than those available from banks and other mainstream lenders.
One reason for this is that the automated and internet-only nature of peer-to-peer lenders allows them to minimise operating costs. And this saving is passed onto borrowers in the form of a lower APR (annual percentage rate).
Most of the big peer-to-peer lenders in the UK market also offer flexible loan terms such as choice of repayment term and/ or no early repayment charges. This is not the case with most traditional loan providers – regardless of whether you apply through the high street, on the telephone or online.
Finally, some people prefer to borrow via a peer-to-peer lender for personal, ethical reasons – because it allows them to avoid doing business with banks and building societies.
Are there any downsides?
The main disadvantage of peer-to-peer websites applies to the people lending money, not borrowing it. (Their cash will not fall under the Financial Services Compensation Scheme (FSCS), which protects the first £85,000 (as of January 2016) of funds should the provider go bust.
But while borrowers won’t need to worry about this, it’s still important to check the terms and conditions of the loan carefully before taking the plunge.
For example, if you default on a peer-to-peer loan, you will face charges in the same way you would for failing to keep up with repayments on a bank loan.
And remember that any late or missed payments will also be noted on your credit file – potentially making it harder to get credit in the future.
The fact that peer-to-peer applications have to be carried out online may also put some people off, even though you can often contact customer services over the phone if necessary.
You can easily compare both personal loans and loans from peer-to-peer lenders quickly and easily on MoneySuperMarket.