What is peer to peer lending?
Peer to peer lending, also known as P2P lending, is an innovative form of loan which cuts out banks and their fees. By matching those who need finance with those who want to lend money, P2P works like a marketplace – vendors offering loans and customers borrowing the amounts they require. It often provides better value for money than traditional lending streams, which accounts for its recent rise in popularity. It’s also great as an investment as those looking to lend can access a much better return than most savings accounts.
How does peer to peer lending work?
If you’re looking to borrow money but don’t want to use a traditional financial institution like a bank, peer to peer lending matches you with individuals willing to lend the amount you require. P2P companies act as the middlemen for these loans, running the relevant credit checks, organising the loan and managing all repayments. They do take a fee for this service, yet still often remain cheaper than traditional business loans.
The biggest difference between a traditional bank loan and a peer to peer loan is where the money comes from. Peer to peer companies spread the cash of those investing between a number of borrowers. So, if you’re borrowing £10,000, you’ll receive that from a number of different individuals and companies registered as P2P lenders.
On the other hand, if you’re looking to invest £10,000 in a P2P lending scheme, you get more peace of mind by knowing that your money is spread between hundreds, if not thousands of clients, meaning you’ll never be left wholly short-changed by one client.
And don’t think this complicates the process – it’s the responsibility of the P2P platform to return the right money to each individual lender.
What’s more, those looking to loan via peer-to-peer lending have to pass industry standard credit checks, providing an extra level of security. Most P2P platforms allow lenders to choose what risk category they’re happy to loan to. As with most financial incentives, the higher the risk, the greater the return.
As with any kind of business loan, the better your credit rating, the better rate you’ll receive. And if you’re looking to lend, not borrow, there are regulations in place to minimise risk.
For those who are debt-free and willing to invest savings or capital, peer to peer lending offers them the chance for a better return than they’d expect with a typical savings account. By investing in peer to peer lending, individuals and businesses can improve their current savings and inflation rates, making P2P a worthy investment. That being said, there are some risks involved which you’ll should be aware of.
Is P2P lending safe?
Despite the fact banks aren’t involved, P2P lending is not quite the wild west of the finance world you’d initially expect. There are regulations and requirements for both lenders and borrowers, and all applications are subject to credit checks.
For those looking to borrow:
As with any business loan or financial agreement, there are standards which individuals need to meet before any transfer of cash can happen. Lenders need to know that their money will be repaid, meaning you won’t be able to borrow money without checks and referencing.
This doesn’t mean you have to have an exemplary credit score to borrow via P2P.
If your credit score is not sparkly clean, you can often still register for an account and receive loans, but these will be at higher rates. If this sounds like you, it’s worth noting that the rates you receive will still usually be better than traditional bank loan rates.
Most of the risk within peer-to-peer lending is on the side of those putting up the money.
There are regulations in place, such as those introduced by the Financial Conduct Authority (FCA). The FCA framework has the following key objectives, which P2P platforms are now required to help implement:
- Ensure investors receive clear and accurate information about a potential investment and understand the risks involved.
- Ensure investors are adequately remunerated for the risk they are taking
- Ensure transparent and robust systems for assessing the risk, value and price of loans, and fair/transparent charges to investors
- Promote good governance and orderly business practices
www.fca.org.uk – P2P Lending Implementation Review
One of the biggest risks of peer to peer lending is the fact they aren’t covered under the Financial Services Compensation Scheme (FSCS).
Put simply, the FSCS protects lenders in the event of client insolvency. Covering each lender by up to £85,000, they ensure those who lend money aren’t left to fend for themselves when problems arise. However, P2P lending is not covered.
If a borrower defaults, you are at risk of losing your money.
The good news is that because of the way your money is shared between different borrowers, if one defaults, you will barely notice the loss. Adding in the fact that they offer incredibly competitive rates for investors, they are definitely still worth considering.
Which are the best P2P lenders?
As it’s a relatively new market, there’s no set answer to this question. With different amounts of lending and borrowing involved, different rates, and different levels of security, there are quite a few considerations to make before deciding on the best P2P lender.
Because each P2P lending site has numerous lenders, all with their own miniature terms and conditions, it’s often the case that the most competitive deal is not on the site you’ve registered with. That’s why we recommend using a broker like Aurora Capital.
By providing us with some general information, we scour the market for the best P2P lending deals for your precise requirements. This means the best rates and best security, without you having to do the leg-work.
Speak to our expert team now and see how much you could lend via peer-to-peer. Call us on 01371 870815 or email at email@example.com.