What is peer to peer lending?
Peer to peer (P2P) lending is a system of lending and borrowing money that eliminates the need for traditional banks as intermediaries. Often referred to as ‘crowdlending’, the service is facilitated through companies that provide online platforms that match lenders with borrowers.
Lenders hold a chosen amount of money with the P2P platform, which is then invested through loans to individuals or small businesses that may be looking to borrow outside of the traditional banking system.
P2P lending schemes are considered to be significantly riskier than traditional borrowing methods, but they also offer benefits – most notably, the more competitive rates of interest for borrowers and investors.
However, as with traditional financial services, the final annual percentage rate (APR) offered on a P2P loan will be determined by the borrower’s individual circumstances and credit score.
How do peer to peer lenders determine interest rates?
Historically, P2P lenders have offered competitive rates of interest. As predominantly digital platforms, the companies themselves have fewer overheads than banks with multiple branches and staff.
P2P companies can therefore offer lower rates of interest to borrowers, and higher rates of return for investors. As with traditional finance, these rates change depending on the perceived reliability of the borrower and their investment, with credit ratings, business strategy and other personal circumstances all potentially taken into account depending on the type of loan.
Interest rates will of course vary between P2P platforms. But looking at some of the big names will give you an idea of the interest rates on offer. You will see they often categorise borrowers by risk factor, offering a number of different interest rates depending on which risk band the borrower comes under.
How can I get a peer to peer loan?
To apply for a peer to peer loan you need to decide how much you want to borrow and how long you want to borrow for. With this information and your personal details to hand, you can approach the various P2P networks and apply for a loan.
How much can I borrow with a peer to peer loan?
This will depend on your personal circumstances and the providers you’re talking to but as a general guideline peer to peer personal loans are available for between £1,000 and £25,000.
How long can I borrow money for with a peer to peer loan?
Personal loans through peer to peer networks are available with repayment periods of between one and five years in most cases. However, these may differ depending on the platform you use to take your loan out so be sure to check.
How long will it take to get a peer to peer loan?
For a personal peer to peer loan, most providers will take a couple of days to review your application and confirm whether or not they will lend you the money and what APR they will charge you for doing so.
Business loans may take longer due to the additional details that need to be considered.
Are there any restrictions on who can get a peer to peer loan?
Peer to peer loans generally come with the same stringent requirements as bank loans. The details differ by provider but tend to include the following:
- Minimum income level
- Minimum age (usually between 18 and 21)
- UK resident with at least three years of address history
- A credit history
- A personal financial situation that demonstrates you can afford the loan repayments
What can I buy with a peer to peer loan?
Peer to peer loans are used for various different reasons. For businesses, they will be put to use in one way or another to support business growth or to help with cash flow. For individuals, P2P loans are commonly used for the following:
- To finance a car purchase
- Consolidate another more expensive loan, or loans
- Pay for a big life event like a wedding
How do peer to peer networks work for investors?
Different networks work in different ways. On some, investors can browse and choose individual companies or borrowers they want to invest in. In this case, investors will sign up and browse the profiles of borrowers who have also signed up to the network.
Each borrower will have undergone a range of security and credit checks to determine their risk factor. Investors can use the information on these profiles as a guideline when choosing who they want to lend to.
Other options will allow investors to spread their investment across high or low risk investors and the network will decide how this is done, averaging out the returns to each of the investors involved.
Again, it differs by network so look carefully at the different options available to find one that suits your requirements.
Does peer to peer lending offer good rates of return for investors?
Generally speaking, the safer the investment is perceived to be, the lower the rate of return on offer for investors.
For those considering lending through a P2P network as an investment, it’s worth noting that the headline rates of return are based on a ‘projected return’, which accounts for expected loss and company fees.
These are by no means a guarantee and investors should understand the risks before investing their money.
What are the risks of investing in a peer to peer loan?
Different networks have different procedures in place to minimise and spread risk, but lenders must take note of the fact that their capital is at risk when investing in a peer to peer loan.
The risk arises should a borrower default on their payments. This loss will be passed on to you in one way or another by the P2P loan company.
It’s also worth noting that, unlike savings held in a bank account which are protected up to £85,000 per institution, P2P investments are not protected by the government.
Is peer to peer lending an established sector?
The peer to peer lending business got going around 2005 and since then these platforms have lent billions to UK businesses. The market is now established but is still seen by many as an alternative funding route compared to traditional lenders.