Peer-to-peer lending has soared in popularity in recent years, as it offers a way for borrowers to take out a loan at competitive rates, while savers can achieve higher returns than they might from a regular savings account.
However, if you are considering taking out a loan via a peer-to-peer lender, it pays to know exactly how these websites work. Here, we explain all you need to know about peer-to-peer borrowing.
1) The minimum amount you can borrow is usually £1,000, while the maximum is £20,000 or £25,000 depending on which peer-to-peer lender you go to.
Zopa and RateSetter, for example, will both allow you to borrow up to £25,000. You can choose how long you want to borrow for, with loan terms typically ranging from 6 to 12 months, up to five years.
2)Yes you do. To borrow with Zopa you must be at least 20 years old, and must have lived in the UK for at least three years. You’ll also need an income that makes your loan affordable. Similarly, to borrow with RateSetter, you must be at least 21 years old, have a good credit history and a regular income. You must have been a UK resident for at least three years.
3) Some lenders won’t give you a personal quote until you apply for a loan and they get hold of your credit score, but you can check their website to find the representative annual percentage rates (APRs) on offer.
Both Zopa and RateSetter now offer a ‘soft search’ of your credit history, which means you can get a personal quote without applying for a loan. That means you can decide which lender to go through without it affecting your credit score..
4) If you’ve defaulted on debt repayments in the past, have county court judgements (CCJs) against you, or you’ve ever been made bankrupt, the chances are you will be refused a loan by peer-to-peer lenders unless your credit history has improved considerably.
You must be able to demonstrate that you’ve got a history of managing your finances responsibly in order to be offered a loan. Having said that, some peer-to-peer lenders do offer loans to customers who seem riskier, but they charge more for those too. The individual investors can then choose to earn a higher amount of interest by taking on a greater risk.
5) That will depend on your credit score, how much you want to borrow and over what time frame. As a general rule, however, loan rates offered by peer-to-peer lenders tend to be lower than those offered by banks and building societies. This is because peer-to-peer lenders are internet-based, and so have lower overheads than banks with branches. A spokesman for RateSetter said; “With a bank, they use deposits from savers to lend to borrowers and charge high APRs, keeping the profits for themselves. With us, you get to cut out the banks and borrow direct from savers and investors.”
6) Many peer-to-peer lenders also offer business loans, including Zopa, RateSetter and Funding Circle. During the application process you will be asked to add more information about exactly what the loan will be used for.
There may be restrictions on how the borrowing is managed, though. RateSetter, for example, treats business loans under £25,000 as personal loans but will lend larger companies up to £1 million.
7)Yes, there are. As well as the interest charged on your loan, RateSetter usually charges an administration fee and a ‘credit rate fee’, while Zopa charges a ‘borrowing fee’, although it is factored into the loan quote so there are no hidden surprises. These charges will depend on how much you want to borrow, and over what period of time, and your personal credit history. You won’t have to pay anything up front, as the fees are usually included in your monthly repayments but it’s important to check you understand all the costs with any lender.
8) Yes you can, although all your loans cannot exceed the maximum amount any one person can borrow, which is £20,000 or £25,000 depending on which peer-to-peer lender you go to. It is not possible to ‘top up’ an existing loan – but you’ll need to make a separate application.
9) The risks of borrowing through a peer-to-peer lender are pretty much the same as borrowing through any lender. If you are unable to keep up your monthly repayments, the lender will pursue you until your debt is repaid, so you must make sure payments are affordable. You may want to consider taking out insurance to cover your repayments in the event that you lose your job – but this will drive up your monthly payments and may not be necessary. If you do decide to take out insurance then it’s worth comparing premiums from a number of providers and not simply accepting the lender’s offer.
If you do get into financial difficulties and are struggling to repay what you owe, contact the lender as soon as possible to see if you can to an arrangement such as extending the term of the loan.
10) Yes, you can pay off your loan whenever you want and there won’t be any early repayment charges although it’s always important to check each company’s terms and conditions. Paying off what you owe ahead of time is a great idea as it will save you interest. You can usually arrange to repay your loan online.
11) In the event that the peer-to-peer lender managing your debt went bust, you would still have to repay your loan. These websites act as ‘matchmakers’ for individuals and the people who had lent the money would still be owed.