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Peer-to-peer lending

Guide to borrowing through a peer-to-peer loan

Peer-to-peer loans allow you to borrow without heading down the traditional route of turning to your bank or building society. But how do they work and are they a better option for many of us?

By Mehdi Punjwani

Published: 09 February 2021

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When it comes to borrowing through a peer-to-peer lending website it’s important to understand what you’re committing to, including the potential risks as well as the benefits.

While peer-to-peer offers a way of getting a loan without the need to use a bank or building society, you’ll still need a credit check to borrow this way.

Some of the restrictions can be even tighter than banks impose – and while the biggest draw is often the competitive interest rates on borrowing, it’s worth comparing all loan options before making any final decision.

What are peer-to-peer loans?

A peer-to-peer loan is like any other unsecured personal loan. The only difference is that you’re 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 as matchmakers, pairing up people who want to earn a return on their money with those who want to borrow. The peer-to-peer website helps set an interest rate that is favourable to both.

There is flexibility in the types of loans and rates on offer. Those with lower credit scores can potentially borrow at higher interest rates from individuals who are looking for a bigger return and willing to accept more risk.

Similarly, those with excellent credit ratings who are unlikely to miss a payment should be able to seek a lower rate of borrowing from more risk-averse lenders.

This means that just like loans from more traditional lenders, the interest rate you’re offered will depend on your credit score.

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.

Each peer-to-peer lender will have their own rules about who can apply for a loan. Most will set a minimum age, normally 18 or 21, and they’ll ask that you show proof of a minimum amount of income, and that you’ve been a UK resident for a number of years.

Are peer-to-peer loans a good idea?

The main advantage of peer-to-peer loans is that they can have the potential to offer lower interest rates than those available from banks and other mainstream lenders.

This is largely because the automated and internet-only nature of peer-to-peer lenders allows them to minimise operating costs – a saving that can be 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 a choice of repayment term and/or no early repayment charges.

However, while banks and building societies have strict lending criteria which determines whether you’ll be offered a loan and at what interest rate, peer-to-peer borrowers also face similar credit checks.

Before proceeding you will need to be comfortable borrowing in a digital-only environment. There are no high street branches to drop into should you have a problem and while there may be a customer service line, peer-to-peer is web-interface focused.

It’s 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’ll face charges in the same way you would for failing to keep up with repayments on a bank loan.

Any late or missed payments will also be noted on your credit file – potentially making it harder to get credit in the future. You may also incur admin fees when taking out the loan. Although these may not have to be paid upfront, by being bundled in with the overall amount, you’ll end up paying interest of them too.

You can compare both personal loans and loans from peer-to-peer lenders quickly and easily on MoneySuperMarket. Read more with our guides to finding the right loan for you.

Can I get a peer-to-peer loan with bad credit?

A peer-to-peer loan shouldn’t be seen as the easy option for a potential borrower with a bad credit rating.

In fact, some peer-to-peer sites have criteria stricter thank high street banks as they attempt to keep defaults to a minimum.

Understand that as a borrower applying for a loan you’ll be treated in much the same way as you would by a traditional high street lender.

Your credit record will be checked using a credit reference agency and you’ll have to pass the peer-to-peer company’s own checks as well. Generally, you will only be entitled to the better deals if you’ve a good credit rating

The interest you pay is also likely to be proportional to your credit rating, so generally the lower your score, the higher the interest rate. Read more with our guide on how to get a loan with bad credit.

You should also look to improve your credit rating whenever possible. MoneySuperMarket’s Credit Monitor gives you free access to your credit score and report, along with personalised tips and insights that may help you get where you need to be. You can also read more on how to improve your credit score here.

Are peer-to-peer loans safe?

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 of funds should the provider go bust.

Borrowers don’t need to worry about this, but they should still check the terms of the loans carefully.

If you miss payments you will face charges in the same way you would for any other loan. Late or missed payments will also be noted on your credit file.

If you default on a peer-to-peer loan, the company might also pass the loan on to a debt collection agency which will chase it on behalf of the lender or lenders. As a last resort, it might go to court.

If you do find yourself owing an increasing amount, you can find help with next steps with our useful guides to debt.

Find the best deal on loans

Interest rates and terms offered on all types of loan can vary widely, so it’s vital to shop around for the best deal.

You can do this quickly and easily by using MoneySuperMarket to compare a range of different loans from a wide range of lenders.

We use what’s known as a soft search on your credit history, so your credit score won’t be affected. When you’re pre-approved for a loan, you know that if you apply, you’ll be accepted and get the deal you see.