Peer-to-peer lending is an alternative investment whereby investors and borrowers are matched via websites known as peer to peer lending platforms. In the past, whenever you were in urgent need of money, you had to look towards the financial institutions and banks. But now, you have a lot of alternative funding options, including peer-to-peer loans where you can lend money from other individuals by using a platform as an intermediary. P2p lending is also known as social lending or crowdlending, and it also provides investors with an opportunity to invest their money and earn high returns on it.
In the UK peer to peer lending was started in 2005 and became popular in a short time. Since then, it has lent billions to UK individuals and businesses. As a result, the P2p lending market is now established, but many people still consider it as a niche option compared to conventional investment options with line of credit for small businesses.
How Does It Work?
P2p lending platforms bring borrowers and lenders together. You can borrow money directly through a p2p platform or submit your requirements on a comparison site that will search for the best deal for you. The number of p2p platforms is increasing dramatically in the UK. That is why it is challenging for borrowers to find the best one. Online comparison sites can help you in providing a quick comparison of leading p2p platforms and save your time and energy.
When you make a loan application, it is assessed almost in the same way as an application to bank loans. P2p platform will analyse your credit history and set the level of risk involved in lending money to you. After the approval of the loan application platform matches you with the lenders willing to offer you a p2p loan.
On the other hand, if you are willing to invest in p2p loans, you have to make an account on a platform of your choice and deposit funds. These platforms also allow you to choose the return you want to earn and spread your money across multiple borrowers. It helps you in reducing the risks involved in p2p loans. Each p2p platform operates differently and offers different protection levels. So it is essential to do research and find the right platform for you. Generally, the lower the risk, the lower will be the return. You should always invest according to your risk tolerance.
Advantages of P2p For Borrowers
Peer to peer lending offers some benefits to the borrowers over other forms of borrowing. Let’s have a look at these advantages:
Fast And Convenient Application
As peer to peer platforms operate online entirely, it means you can make applications from anywhere. The process is fast and convenient compared to traditional bank loans. Many p2p platforms have a list of lenders waiting to lend money. Through an automated process, you are matched with the lenders that meet your requirements. In this way, you can get quick access to funds.
With peer-to-peer lending, you can usually get access to lower interest rates than conventional bank loans. As there is no intermediary or bank involved and you are borrowing money directly from the individuals, there are no overhead charges. P2p platforms allow both borrowers and lenders to secure the best interest rates.
Initial Quote Doesn’t Affect Credit Score.
If you want to take out a personal loan via p2p platforms, you can get a personalised initial quote without affecting your credit score. This way, you can get a better idea of the interest you have to pay and can also know whether you can afford to take a loan or not.
Flexible And Unsecured
Most of the peer to peer loans are unsecured, and you do not need to use any of your valuable assets as security against the loan. It also ensures that the application process is uncomplicated and quick, and you can get access to the funds within a short time.
Alternative To Traditional Loans
For individuals who are looking for alternative funding options to the traditional banks, p2p lending is an alternative that is worth considering. It proves to be a healthier marketplace for consumers.
Although you get loans from individuals, the p2p platform acts as an intermediary, and you do not have direct contact with the lenders—all the processes from getting funds to making repayments take place through online platforms.
Disadvantages Of P2p Lending For borrowers
P2p loans can be a great alternative to traditional loans, but they come with some drawbacks that you should keep in mind when applying for a p2p loan. Let’s take a closer look:
Credit Checks To Secure A Loan
Peer to peer lending removes intermediaries or banks, and it does not mean there is no underwriting process. P2p platform conducts a credit check and other internal checks to ensure that you are creditworthy. It is a safety measure by p2p platforms to protect investors from default loans.
If you have a bad credit score, you must work on improving it before taking a loan because the underwriters carry out a full credit check that can show up on your credit record and cause a negative impact on it.
One other thing that you should keep in mind when taking a p2p loan is that you have to pay a loan arrangement fee. P2p platforms earn money by charging fees from borrowers and lenders. This fee can also be used in safety measures such as saved as contingency funds to save investors from default loans. However, these charges add up to your borrowing cost and make it expensive, so you must be aware of it to avoid any inconvenience later.
Like any other loan, it is essential for you to consider whether p2p loans are the right choice for you or not. Now you have an idea of the benefits and drawbacks of peer to peer loans, and you can make an informed decision.