Peer to peer lending is alternative finance that is gradually changing the financial landscape. It proves to be beneficial for both the borrowers and investors and makes lending and borrowing easier than before. All the processes, from investing money to receiving repayments, takes place through online platforms. If you want to invest money, there is no need to go to a bank or any financial institution. You can start it by making an online account on a p2p platform. As a result, you can earn higher rates compared to bank savings accounts and conventional investments. Borrowers can also take advantage of lower rates than standard bank loans and get quick access to funds.
You may have heard about peer to peer lending UK but do not have a complete understanding of this innovative finance. Here in this article, we are going to describe all the things that you should know about it.
What Is Peer To Peer Lending?
Peer to peer lending is also known as social lending or p2p lending. It is not a new concept from hundreds of years from each other. Only a new thing is that now tech-based platforms make the process simple and easy. It cuts off banks and other financial institutions and matches lenders directly to the potential borrowers. This lamination of banks results in better rates for both the investors and borrowers. With the increasing popularity, the number of peer to peer platforms is increasing dramatically. So, it may be challenging for you to find the right platform. However, you can choose one that meets your requirements by doing research.
P2p platforms act as intermediaries, facilitate all the transactions, and set interest rates and loan terms. They act as a marketplace and bring investors and borrowers to the same platform.
Working Of Peer To Lending
Let’s take a closer look at how this alternative finance works for investors and borrowers.
Investors
Attractive returns are the most significant reason why investors are shifting to p2p investment. It also provides them with an opportunity to diversify their investment portfolio and earn maximum returns. The process of the investment may vary from platform to platform, but it is something like this on all the platforms:
- Select a platform that matches your investment goals and create an account.
- Deposit funds to invest in loans. View the loans on the platform and evaluate them.
- Always spread your investment to multiple loans. You can also use auto-invest to spread your amount across multiple loans.
- Some platforms have minimum investment requirements, and you can not invest below that amount.
Borrowers
If you are thinking of taking a peer to peer loan, you have to register yourself as a borrower on a platform. Unlike traditional bank loans that require lengthy paperwork and take a long time to approve, p2p platforms need less documentation and approve loans faster. Furthermore, they process loans faster because of advanced technology to evaluate loan applications. In addition, all the p2p platforms operate online, which reduces the disbursement time.
Every peer to peer platform has its own lending process terms and rates, but there are some common things. You can take out a loan by following the steps below:
- You have to register yourself as a borrower and fill out a loan application. Enter all the essential information, such as the amount you want to borrow and for how long.
- The platforms assign a grade to you depending on your credit score. This grading helps investors know the creditworthiness and risks associated with borrowers.
- You also have to submit necessary documents such as proof of identity, income and employment records.
- P2p platform then evaluates your loan application and sets the interest rate and loan terms.
- Once your application is approved, you can get funds transferred to your bank account within a short time.
Benefits Of P2p Lending
Peer to peer lending offers numerous benefits for both the borrowers and investors. Here are some of these benefits.
- In this low-interest rate environment, peer to peer, the investment provides an opportunity for investors to earn high-interest rates to keep up with inflation.
- It offers ease and flexibility as there is no need to go to a bank or meet an agent in person. You can start investing from anywhere by making an account as an investor. In the same way as a borrower, you do not need to go to a bank and apply for a loan online without any hassle and lengthy paperwork.
- P2p platforms allow you to create a diversified portfolio and spread investment across multiple loans to reduce the risks of losing money.
- These platforms offer various types of loans such as personal loans, business loans and property loans, and you can invest in a loan that meets your investment goals.
- Borrowers can get quick access to funds and do not need to wait for weeks or months for loan approval. In addition, the interest rate is lower than the conventional loans.
Peer To Peer Lending Risk
Although p2p lending is beneficial for investors and borrowers, it is not risk-free. Therefore, you must keep in mind these risks.
Borrowers Default
The individual or business that borrows money may not be able to repay the loan amount. It is known as borrower default, and you can lose all your money in such situations. Your p2p investment is not protected by the Financial Services Compensation Scheme (FSCS). However, some platforms have provision funds to provide protection to the investors.
Platform Going Bust
You can also lose your money if the platform goes out of business. But if you choose a platform that is FCA authorised, your money is put in ring-fenced accounts, and you will get it even if the platform goes bust.
Risk Of Early Or Late Repayment
You cannot earn the expected returns when a loan is repaid early or late. However, if the loan is repaid early, you can lend out again but may not receive the same interest rate.
From the borrower’s point of view, there is not any risk. You only need to make price comparisons and do research so that you can borrow through a well-reputed platform and at a competitive rate.
We hope that now you know most about peer to peer lending and can decide whether you should use it for lending or borrowing money.