Peer-to-peer lending, also known as social lending or p2p lending, is an alternative source of funding that does not involve any financial institution like banks. It works through online platforms providing its services to match the investors with potential borrowers. It results in lowering additional costs and significantly reducing overhead costs. With this type of lending, investors can find high-interest rates compared to traditional saving methods offered by the banks. In addition, they can earn interest in a tax-free wrapper by investing through innovative finance ISA (IFISA). Those who are looking to borrow money can get quick loans at a lower rate than the standard bank loans.
Most p2p platforms offer both investors and borrowers the best services to ensure a successful and safe transaction. They include all the security features, credit checks, verification processes, and identification of new lenders and borrowers.
Quick Facts About P2p Loans
Here are a few facts about p2p loans that you may not know.
Fast And Cheap Loans
When you use a p2p platform to borrow money, the interaction between you and the lender is much closer when compared to banks. It helps individuals and small businesses to secure a loan without involving a middle man. As a result, many processes have been eliminated that play a role in slowing down the application process. It means that you can complete the application process faster and can also get a loan at a lower rate than traditional loans.
Credit Checking Of Borrowers
Along with the borrowers peer to peer lending also brings benefits for the investors. Lenders always want to know where their investment is going. So p2p platforms always check the borrowers’ credit scores before accepting their loan requests. It is a soft credit check that does not cause a significant impact on the borrower’s crest rating. On the basis of credit and affordability checks, these platforms categorize borrowers as low or high-risk borrowers. Investors can select the borrowers by reading their risk profiles.
Competitive Repayment Rates
Another reason for the rapid popularity of peer-to-peer loans is that they offer low-interest rates. However, it depends on the credit history of the borrowers. If their credit score is low, they have to pay high interest to reduce the risk for the investors. Most often, borrowers can take the benefit of competitive repayment rates. Usually, p2p platforms advertise their loans with rates of around 3%.
Diversification
One significant advantage for investors is that they can split their investments into small chunks. It means that you can spread your investment across multiple loans to reduce the risk of borrower default.
Different Types Of P2p Platforms
When it comes to choosing a p2p platform, you should keep in mind that it is not a one size fits all approach. There are different types of platforms dealing with different kinds of loans. So it would be best if you shop around to find a platform that meets all your requirements.
Working Of P2p Finance
Peer-to-peer lending platforms allow investors to connect directly with the borrowers. The interest rate can vary from platform to platform and also depends on the borrower’s credit score. Investors can open an account on a platform of their choice and start investing in p2p loans. On the other hand, if you want to take a loan, you have to register yourself as a borrower and make an online application. On the basis of your information, the platform places you in a risk category that will eventually describe how much interest you have to pay. Borrowers repay the loan amount plus interest in a monthly installment that is the income and profit of investors.
Benefits Of P2p Lending
The most significant benefit is that p2p platforms operate online, and the application process is faster than traditional methods. Also, the borrowers and investors are matched online, so there are no overhead charges that often slow down the process.
In peer-to-peer lending, things are kept simple. These platforms act as intermediaries between the borrowers and investors. Both parties usually do not know each other or have very small interactions. Investors can earn tax-free interest by investing through IFISA. Peer-to-peer loans offer more flexibility than other forms of borrowing. You can use them for a number of purposes and also decide on which month and date you will repay the loan. Moreover, you can also repay the loan early without paying any early repayment fee.
Drawbacks Of P2p Lending
The fee and charges that banks and building societies charge can vary, but most p2p platforms charge a loan arrangement fee. This fee mainly goes towards two things that include: keeping the platform running and fulfilling all the security measures to prevent borrowers defaulting. The amount of fee usually depends on the amount you want to borrow. Before loan approval, you have to pass through a credit check. If your credit rating is low, you have to pay a high-interest amount. If you have a poor credit history, it can be challenging to get a p2p loan.
From the investor’s point of view, the most significant risk in p2p lending is the risk of default. You can lose all your money if a borrower is not able to repay the loan. Other than that, there is a risk of the platform going out of business. Therefore, you should choose a platform that has been working in the field for a number of years and has a good reputation.
We hope that now you have essential information about peer-to-peer lending UK. It will be easier for you to make a decision whether it is the right option for you or not. It is excellent alternative finance that can be beneficial for borrowers and investors. There are some risks involved in it that you must consider before making a final decision. However, if you take measures to reduce risks, it can be an efficient source to earn regular income.
