How peer-to-peer loans work
The alternative finance industry has seen a surge in popularity over recent years. In an age where technology and connectivity are increasingly at the heart of everything, there are many alternatives to traditional banking. One such challenger to the market is peer-to-peer lending.
This method of lending and borrowing has gained attention as it allows people to loan and apply for loans directly with other people. Banks and financial institutions are left out of the loop. In this article, we cover everything you need to know about peer-to-peer lending and where you can get some of the best loans.
What is a peer-to-peer loan?
A peer-to-peer loan is much like other unsecured forms of personal credit. The main difference between them and a traditional loan is that you borrow directly from an individual (or individuals) instead of a bank.
The basic concept sees borrowers matched with lenders online. They then agree on a rate between them. This is a useful system for both the lender and the borrower. The former can get a higher return by lending to users who have poor credit scores. Those who take out the loan gain access to finance options that may not be available to them via high-street banks.
Am I eligible for a peer-to-peer loan?
As with many similar services, your eligibility depends on your current and historical financial situation. The main factor in determining whether you can apply for a loan is your credit rating. The better your score, the more likely you are to be accepted. However, even those with a poor credit history may still find a lender. It will be possible that you'll have to pay a higher rate of interest if this is the case.
Some peer-to-peer loan websites allow you to perform a soft credit check to assess your eligibility. This check won't affect your credit rating but can mean you find a lender with a suitable arrangement. You will likely need to over 18 (21, in some cases), and be a UK resident in full-time employment.
Advantages and disadvantages of P2P loans
This type of lending is disrupting the status quo, which can be a good thing. However, as with any such service, there are some pros and cons of using it:
If your credit rating is poor, you may have more chance of finding a loan than with a bank.
They can be an affordable way of borrowing money, particularly if you have a good credit rating.
There's usually a lot of flexibility with repayment terms and early payments.
You can often borrow small amounts, unlike with mainstream lenders.
If your credit rating is low, you may still find it hard to find a lender. If you do, the APR will be high.
Depending on the service you use, you have less protection than if you were to borrow with a bank.
There are sometimes fees for using peer-to-peer loan platforms.
What happens if I can't repay the loan?
The same penalties apply as with regular loans. If you miss a payment or default on the loan, your credit rating will be negatively impacted. This will affect your ability to borrow money in the future. You will also incur charges on the amount.
If you are unable to pay, the lender may also pass the debt onto an agency that will then pursue you for the money. As with other loans, it's therefore advisable to only borrow what you can afford to pay back.
Alternatives to peer-to-peer loans
Although this type of borrowing and lending is becoming more popular, there are still plenty of other options for obtaining credit, even if you have a poor credit rating:
Bad credit personal loans. Some financial providers offer loans tailored specifically towards those with a poor credit score. They often have a high APR, but can be used to increase your rating over time.
Bad credit cards. These are the same as the above and often have similar rates in terms of APR. Again, you can use these to boost a low credit rating.
Guarantor loans. This refers to borrowing money using someone else to guarantee the loan. Interest rates are usually quite high, and the guarantor is responsible for the debt if you can't repay it.
Secured loans. Some lenders will give you credit if you put up an asset as collateral. Often, this will be a vehicle or equity in a house.
The best peer-to-peer loans
We've picked out some of the top peer-to-peer lenders and highlighted what makes them such appealing prospects:
RateSetter offers some attractive rates and has plenty of options in terms of borrowing and repayment:
Borrow between £100 and £35,000 with a representative 3.9% APR. Of course, this only applies if you have a high credit score.
Loans can be repaid over 1-5 years.
Their website is easy to use and gives a soft credit check to assess eligibility, which won't affect your credit rating.
Lending Works gets a very high rating from multiple review sites thanks to their easy-to-use platform and transparent service:
Borrow between _ and _ with a representative APR of 9.9% subject to credit check.
Repayment terms range from _ months to _ years.
It's quick and easy to get a personalised quote, without it impacting your credit score.
Zopa was one of the first companies to offer peer-to-peer lending and they've built up a good reputation over the years:
Loan between £1000 and £25,000 with a representative APR ranging from 2.9% to 34.9%.
Borrow money from 1 year to 5 years.
Zopa is one of the trusted names in the industry, having approved over £3 billion in loans since 2005.
OnStride offer loans ranging in size and scope, making them a popular choice:
Customers can borrow anything from £150 up to £5000. However, their APR reaches a staggering 311.3% APR representative.
Loans can be taken out for 6 months to 3 years.
APR rates are based on credit history, so if you have a poor rating, you can expect to pay a high rate of interest.