Over recent years, a new form of lending has been cultivating popularity. Peer-to-peer, or social lending, is a way for individuals to borrow and lend money to each other via the Internet.
What are Peer-to-peer Loans?
The term peer to peer refers to individuals who use purpose-built websites to lend money to or borrow money from peers, other individuals, as opposed to banks, building societies, or other large financial institutions. The lender decides what type of borrower they would like to lend to and at what rate of interest, and the borrowers are matched to lenders by the website based on their credit profile.
The interest rate on each loan is based on the borrower's credit history, the amount borrowed and term of the loan, and the rate set by the lender or lenders on their money.
Advantages for Borrowers
- Peer-to-peer loans usually have lower interest rates than banks and building societies, especially if you have good credit.
- You can borrow small amounts, with some websites having no minimum loan amount
- If your credit history isn't bad, but you've still had trouble borrowing from banks or building societies, peer to peer is another option.
- Usually you can pay your loan back early without a penalty and no additional interest
- The lending website does a soft credit check, which means your credit file won't be affected by the application on its own (but it will be affected if you default)
Drawbacks for Borrowers
- If your credit rating is not good, you will end up paying more interest than with a high street bank loan.
- The peer-to-peer loan company takes a fee for arranging the loan. Sometimes this fee will apply even if your loan is not fully funded.
- If you have a poor credit score, your loan can still be rejected.
Is it safe to borrow?
Peer-to-peer lending websites have a credit license from the Office of Fair Trading, so you have the same protection as with a bank or building society. If you miss a payment, or don't pay back the loan, it will affect your credit rating, and your loan will be passed to a debt collection agency and you could be taken to court.
If the website you arranged the loan through goes bust, the loan arrangement still stands. If the money you borrowed is being temporarily held in escrow by the website, it's likely you will still receive the loan, although this lending model is relatively new and the legal implications of one of these companies going into administration have not been fully explored.
Peer-to-peer loans are not right for everyone, but if you are looking to borrow a small amount, or have a good credit rating but not good enough for banks or building societies, peer-to-peer borrowing may suit. Be sure to use Money Dashboard free money management software to stay on budget and make sure you don't miss a repayment.