Peer to peer lending (P2P lending) is a relatively new form of borrowing. It has only been around since 2005, and since then has grown in popularity as an alternative source of finance for businesses and individuals. P2P lending sites connect people looking to borrow money with people who have capital which they want to grow. By connecting borrowers and lenders directly, both parties can often get a better deal, cutting out all the costs usually taken by the middleman, which tends to be a commercial lending bank.
As a funding vehicle, it has shaken up the way that individuals and businesses can access finance. Removing the middle party has multiple benefits but comes with its disadvantages too.
Pros
- P2P offers a useful alternative for those who have been rejected by the bank for a traditional bank loan, or who have been unsuccessful in finding funding through more conventional routes.
- It’s a fast, efficient way for borrowers to get hold of the money they need, with the entire process being online. Successful loan applicants have been known to receive funds the same day, or in under 48 hours.
- Borrowers benefit from fixed monthly payments and lower interest rates compared to banks.
- Most loans are unsecured, meaning you don’t need to put up collateral or security.
- There’s more flexibility in how you use the loan than through more conventional forms of finance.
- Repayment is automatic.
- There’s usually no penalty for repaying the funds early.
- Borrowers can check their rates without their credit score being affected.
Cons
- If you have poor credit, you may only be able to access the high-interest rates of up to 36%. Those with especially poor credit, usually below 630, may be ineligible for a loan on most P2P platforms.
- There’s usually a cap to the amount you can borrow, typically around £30K.
- Some sites have high fees, such as origination fees of up to 6%, early termination fees and late payment fees.
- Missing your loan repayments will damage your credit score.
- Banks usually reject borrowers for legitimate reasons. If a bank refuses you a loan because they think you can’t afford it, it may be risky to pursue a loan elsewhere.
What if my P2P finance platform goes bust?
As with any financial service, there is always the risk that the service itself will go bust. Several P2P companies have gone out of business, which poses a risk for their lenders. Any money that you lend on a P2P website is not covered by the Financial Services Compensation Scheme (FSCS), which means that you cannot get help recuperating money if the platform goes out of business. This lack of safety net makes P2P lending a riskier venture than investing with banks and buildings societies, which are covered by the FSCS.
That said, many P2P websites have contingency funds or provision funds, which can pay out if a borrower defaults on their loan. For this reason, it’s essential only to use P2P websites which are regulated by the Financial Conduct Authority. Companies controlled in this way must keep lenders’ money in separate accounts to their own, which reduces the risk for the lender. These accounts are usually ringfenced and held with a different bank, which will be protected under the FSCS.
