Up until recently, the only true option for obtaining a loan was to speak with a bank or other financial organization. However, there are now alternative funding options available, such as peer-to-peer (P2P) loans, in which one person lends money to another through the use of a website. P2P lending, also known as social lending, crowd lending, or even crowdfunding, gives investors an additional way to make money.
Around 2005 saw the start of the P2P loan industry in the UK, which has since lent billions to both individuals and businesses there. Despite the market’s maturity, many people still view it as a specialized lending choice when compared to conventional lenders.
How Does P2P Function?
P2P platforms connect lenders and borrowers. You can utilize a peer-to-peer loan comparison website to find the best price if you want to borrow money, or you can submit your requests directly to one of the numerous P2P sites in the UK.
Your loan application will be evaluated similarly to a typical bank application. In order to determine your credit rating or the risk associated with lending to you, the P2P loan platform will use a credit reference agency to sift through publicly available information, such as the electoral register, and will assess your financial history.
Benefits to the Borrower
- If you have a solid credit score, P2P lending system sites may offer more enticing interest rates than banks and building societies.
- Peer-to-peer loans may be available on some websites to borrowers with less-than-ideal credit. Additionally, they could be more flexible with loan amounts than banks or building societies, which frequently have minimums.
- If you no longer require the loan, you may be able to pay it off early or make an overpayment on some platforms without incurring fees.
- The process is typically quick and convenient because it is online.
- There are many different things for which you can borrow money, including for commercial purposes.
Drawbacks of the P2P Lending For the Loan Customers
- You are not insured by the Financial Services Compensation Scheme for loans you make. Therefore, you stand to lose money if a borrower defaults on a loan.
- You’ll probably need to find another lender who will take on the loan if you want to receive your money back during the term of the loan arrangement. Normally, the platform can set this up for you, although the procedure might not always go as quickly as you’d like. A fee can also apply.
- If a borrower pays back a peer-to-peer loan early, returns might not be as high as anticipated.
Benefits For The Investor/Lender
- It might be possible to access a rate of return that is far better than what is currently offered by traditional investments, such as bonds or savings accounts.
- In terms of the characteristics of the borrowers you lend money to, you can decide what level of risk you’re willing to accept.
- Some websites offer backup money to shield investors from defaulting borrowers.
- If you make investments through an Innovative Finance Individual Savings Account (IFISA), you can get P2P lending income tax-free.
Drawbacks For The Borrower
- In addition to the loan’s interest rate, you can also have to pay other costs.
- If you have a bad credit rating, you can be required to pay an interest rate that is more than what regular lenders charge. If your financial profile is particularly low, you might not even be eligible for a P2P loan.
- You might not get the same protection as you would if you took out a loan from a conventional lender if you had trouble repaying it. For instance, a P2P service might transfer the problematic debt to a debt collection company, which might then take you to court.
Conclusion
Investors may want to think about more conventional sources of income including government or corporate bonds, equities and share-based investments, and savings accounts for the online marketplace.
