In a few years, there is one new type of loan that has been increasing in popularity a peer-to-peer loan.
It is developed to cut out the role of the middleman between the lender and the borrower. That means borrowers can directly be connected to the borrowers.
This is a platform where the lender can directly or semi-directly lend to the borrower. The principle is that the individuals who want to loan money must match those who want to lend them.
Read this article to know P2P in detail. Let’s discover the various aspects of a P2P loan.
What is a peer-to-peer loan?
Peer-to-peer loaning is allowing people to borrow money from the individual who desires to lend it. There is no need for any bank or financial organization.
This direct approach let the lenders earn a higher interest rate; the borrowers also pay a lower one. This is because a P2P platform has lesser overheads than a bank.
But some companies act as a middleman between the lender and the borrower. These companies provide this platform.
If you want to borrow money, peer-to-peer websites will match you up with lenders. Then, your credit report will be checked by a credit reference agency. Your credit score must be passed by the peer-to-peer company’s checks.
Then, you will become eligible for taking a peer-to-peer loan.
How does a peer to peer borrowing work?
There are various P2P platforms available in the UK market to choose from. The lender needs to register in a P2P platform. And you need to pay money in direct cash or using a credit card.
Then the lenders need to fix the rate of interest and the period they would like to lend the money for.
If you as a borrower are applying for a loan then the lender will focus on your previous credit history. if your credit score satisfies the lender then he will agree to lend you the money.
Besides, you also need to check the terms and rate of interest set by the lender. If these are perfectly suited to you then you can take a loan from the lender whom you have chosen.
There are different products offered including different types of terms, rates of interest, risks, and withdrawal terms. So, you need to check very carefully before going ahead further.
How do you apply for a peer-to-peer loan?
The intendant lenders and borrowers need to register to any P2P lending platform. They both need to be signed up and become a member of the platform for further processing. Then the P2P lenders will check some perspectives such as credit history, the purpose of the loan, income, etc.
This process is quite similar to that performed by banking institutions. But, P2p lending regulations are quite to be flexible. Depending upon the results of these checks, you as the borrower can be assigned to different categories. These categories will be assigned to you depending on your perceived risk factor.
If you seem to them a lower risk of defaulting then you can get a lower rate of interest. Whereas if they assume that you may be at a higher risk of defaulting then you might be posed a higher interest rate.
There may be multiple lenders in the platform to provide a loan to a single borrower. But the terms and rate of interest can vary from lender to lender.
Lenders, who have signed up on this platform intending to lend money also have to undergo some checks. The money that the lender intendant to loan, has not been obtained through illegal activities.
How much do a peer to peer borrowing cost?
The interest rate of different peer-to-peer loans varies on your credit score. Further, how much the lenders could see the probability of risks on you.
- If you own a very good credit score then you can get a loan at a very lower rate of interest. You may get it around 3%. But, you need to keep in mind that the rate of interest is variable. It may go upward or downward each month.
- If you have a poor credit history then you have to pay very high interest. You may need to pay even a 30% rate of interest. Otherwise, your application may be rejected.
You must be aware of these facts before applying for a peer-to-peer loan:
Before choosing a peer-to-peer loan, you need to be aware of:
- If you become a defaulter in a peer-to-peer loan, the company can pass the debt to a debt collection agency. The agency will chase it on behalf of the company. As a result, they can also go to court.
- If you miss any repayments on the peer-to-peer loan; it may affect your credit rating.
Pros and cons of Peer to Peer loan:
Pros:
- You can get a peer-to-peer loan at a lower interest than a bank or other loan-providing organizations.
- If you are facing getting a loan from any bank or building society due to your credit rating, then peer to peer loan is an option.
- Some peer-to-peer platform doesn’t have any minimum amount for lending. So, if you need to borrow a smaller amount for a shorter period, you can opt for it.
Cons:
- You must be aware of the fact that the interest rate might be higher than the bank or building society.
- If you own a poor credit rating then you may find it difficult to get a peer-to-peer loan.
- You might need to pay an amount to the platform for arranging the loan. If you struggle to get your total amount from a single lender, you need to contact various lenders. That means you have to pay the platform multiple fees.
- You must check what protection you do have before applying for a loan. You might not have the same protection through the FSCS (Financial Services Compensation scheme).
Visitors Also May Ask:-
Is peer-to-peer loan safe in the UK?
Ans: In the United Kingdom, each P2P platform is controlled by FCA (Financial Conduct Authority). Unlike other loan-providing organizations, lenders can choose the borrowers on this platform.
They decide whether they will provide a loan to a riskier borrower with a higher interest rate. Also, they provide a safer borrower with a lower interest rate.
Which peer-to-peer loan is the best in the UK?
Ans: The lowest-risk peer-to-peer company in the UK is Loanpad. It is also most probably the safest investment in the UK. This platform is extremely successful in the UK. It keeps all its lenders and borrowers on the safest track.
Is there any risk in peer-to-peer loans in the UK?
Ans: Peer-to-peer loans must be as safe for borrowers similar for any other loan-providing organization such as a bank. But, the scenario may not be the same for the lenders. Lenders take on the real risk on this platform
Wrap up:
The peer-to-peer loan is continuously developing to grow. It can help you to get a loan at a lower interest rate than a bank. But, you must be so careful about the terms, rate of interest, and any hidden fees there.
As a borrower, it is a unique way to get your required money from an individual without involving any bank.
Peer-to-peer platforms are regulated by FCA. So, if you have any complaint against any lenders you can directly contact FOS (Financial Ombudsman services).
