Should I get a peer to peer loan?
Peer-to-peer lending whereby specialist websites (known as platforms) bring lenders and borrowers together, offers borrowers an easily accessible alternative to traditional lenders such as banks and building societies. But how do you go about getting a peer-to-peer loan?
Peer-to-peer (P2P) lending began in the UK in 2005 and since then, the platforms have facilitated billions of pounds in loans to businesses and individuals. There are now a whole host of options to choose from.
The best-known ones offer loans of between £1,000 and £25,000, repayable over one to five years. You can get a peer-to-peer loan for a variety of purposes, from buying a car to debt consolidation. Businesses in need of cash can take out peer-to-peer loans too.
» COMPARE: P2P business loans
You may be able to access lower interest rates than you’d pay if you were to take out a loan with a traditional lender. However, the cost of borrowing will depend on how good a risk the lender thinks you are. This means they’ll make an assessment of how likely you are to run into any difficulties in repaying the loan. The greater the risk, the higher the interest rate you’ll be charged. Just like a traditional lender, they may even decide that lending you money is too risky and refuse to offer you a loan.
The cost of borrowing varies from one peer-to-peer website to another, and can change over time.
Overall, the cost of borrowing could range from as low as 3% to as high as 30%, depending on your credit profile. You may also be charged an “arrangement fee” by the peer-to-peer website.
» MORE: Pros and cons of P2P lending
Can I apply for a peer-to-peer loan?
You’ll have to be at least 18 (and possibly 21) and you’ll have to pass a credit check.
In addition to verifying your identity and address, the platform will also check whether you’ve encountered any financial difficulties in the past and examine your credit score.
It’s best to use a peer-to-peer loan comparison website, rather than apply to just one lender, to help you find the right deal.
» COMPARE: Personal loan rates and deals
The pros and cons of a peer-to-peer loan
- You may be able to access lower interest rates than those available from traditional lenders if you have an excellent credit score.
- The loans are more flexible than other forms of lending, meaning that you can often repay or overpay at any time without penalty, or change your repayment date.
- There’s no need to put up any collateral if you apply for a peer-to-peer loan. That means you don’t have to pledge something you own, such as your house or car, as security to the lender. However, the lender does have a legal right to recover their money in some way if you can’t meet the repayments.
- Just like an application with a traditional lender, you’ll have to have a credit check. And, as with a loan from a traditional lender, the interest rate you’ll be charged will depend on your current financial position and how well you’ve managed your finances in the past.
- You’ll almost certainly be charged an arrangement fee by the peer-to-peer platform.
» MORE: How to improve your credit score
What can I do if I’m unhappy with the service and/or the loan?
Peer-to-peer loans are regulated by the Financial Conduct Authority in the UK. So, if you make a complaint, the business has eight weeks to resolve the issue. If you remain unhappy, you can take your complaint to the Financial Ombudsman Service, which has the power to order the firm to correct any problems at no cost to yourself should it find you have a legitimate complaint.
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Anthony is a BBC-trained journalist. He has worked in financial services and specialised in investments for over 20 years, writing for various wealth managers and leading news titles. Read more