Peer to peer lending. You’ve probably heard people talk about it. But what is it really? What are some peer to peer lending advantages and disadvantages? How does peer to peer lending work? And, most importantly, is peer to peer lending safe? Let’s go through it…
What is Peer to Peer Lending?
Put simply, peer to peer lending is a way of matching up people who want to lend money (lenders) and people who want to borrow (you guessed it, borrowers). Lending in this way means you don’t have to deal with big banks.
Peer to peer websites are simply platforms which match prospective borrowers with lenders. Like Tinder, but for money.
How Does Peer to Peer Lending Work?
If you’re looking to get involved with peer to peer lending, your first step should be consulting a guide – which, if you’re reading this, you’re already doing!
Your second step should be research tailored to your concerns. We’re here to give you the basics, but we’d never tell you what to do with your money. We can lead you to the speed-dating mixer, but we can’t choose whose number you go home with. And nor would we want to.
As we’ll make clear, peer to peer lending has advantages and disadvantages. It can be a great, accessible way in for people new to lending or borrowing, but it also has its risks.
Whatever your interest in peer to peer lending, you can begin by following these steps:
- Consult an introductory guide.
- List your requirements and preferences. Are you looking to lend or borrow? How much money? What results would you like to see?
- Research individual providers (the biggest UK-based names are Funding Circle, RateSetter, and Zopa).
- Check these providers against your list of requirements and preferences. Keep an eye out for the pitfalls we’ve listed below!
- Make a choice on which platform(s) best fit your needs.
Once you’ve done all this, you should be well on your way to making an informed decision about peer to peer lending.
Now that you’ve got some idea how much money you need and what for, you can set up a listing on your chosen platform(s). Again, the online shopping or dating model works well here: you need to sell yourself. Why should an investor want to fund your loan?
Don’t worry if that sounds a little intense, though: this isn’t Dragons’ Den! Many lenders are dealing with small funds, and just want to know that you’ll pay them back, on time and without fuss.
For this reason, you should focus on verifying your identity and income and submitting any credit checks required.
Once you’ve gone through the above steps, you should decide just how much money you’re willing to invest. Regardless of peer to peer lending’s advantages and disadvantages, it remains a form of investment, and investment carries risks!
As always, never gamble more than you can afford to lose.
With this in mind, you can sign up and shoot off. As with borrowers, lenders usually need to be verified, but once you’ve jumped that small hurdle you’ll be able to invest right away!
Who is Peer to Peer Lending For?
Anyone! That’s one of the great advantages of peer to peer lending: anyone can try it. There are risks, of course, but in principle peer to peer lending is open to anyone with decent credit and an internet connection.
What’s Good About Peer to Peer Lending?
Now we get into the meat of things – the peer to peer lending advantages and disadvantages.
There are several peer to peer lending advantages and disadvantages to consider, but the biggest selling point is its ease of use. Borrowers and lenders sign up, verify, and get to borrowing or lending almost immediately.
Peer to peer lending can also offer better returns to both investors and lenders, largely because platforms take less of a cut for themselves than big banks. Whereas a bank might have to maintain and staff thousands of branches across the country, peer to peer platforms often only have to worry about a website.
This means that more of the money they handle can go where it needs to go, and stay there.
The main reason borrowers have been flocking to peer to peer loans is the lower interest rates they offer.
Where big banks tend to offer their way or the highway, peer to peer lending platforms can get borrowers better deals.
This is because on the peer to peer model, lenders compete to offer borrowers the most attractive rate.
So borrowers can effectively save twice: once due to peer to peer platforms’ lower overhead costs, and once more due to lenders being encouraged to offer the best deals possible.
On many platforms, it’s also easier to get credit.
‘Peer to peer lending, advantages and disadvantages, safety, risks – it’s just not for me! I’m not an investor!’
I know the feeling.
But peer to peer lending has a lot to offer ordinary people.
Similarly to borrowers, peer to peer lending’s main attraction for lenders is higher rates of return on your investment. Most platforms ask for no additional fees from lenders, and some, such as RateSetter, offer even higher rates of return to those who store money with them for a long time.
What’s more, peer to peer lending also makes it easy for investors to diversify – to split their cash up into smaller chunks and spread their investment out, minimising risk.
Is Peer to Peer Lending Suitable for Someone with Bad Credit?
The important thing to note with peer to peer lending is that the only real difference is where the money comes from. It is still the case that having bad credit will reduce your chances of approval and increase rates you might be offered. It’s always good to make sure your credit is in it’s best shape when making any applications.
If you think you might have bad credit, you’d benefit from signing up for a free account with Credibble as you’ll be able to see exactly where you stand, as well as actionable insights into what you can do to increase your creditworthiness. Checking your credit report with Credibble doesn’t have any impact, so you have nothing to lose.
What Should I Watch Out For?
Peer to peer lending has advantages and disadvantages. We’ve gone over the former, and now we turn to the latter. What are some major pitfalls of peer to peer lending?
As mentioned above, the most important thing to understand about peer to peer lending is that it is not risk-free. Peer to peer lending is an investment, so there’s always the chance that you could lose money. If you prize safety above all else, keep your money in a bank.
Further, as with all loans, peer to peer loans carry some risk of default.
Where savings in banks and building societies are protected in the UK by the Financial Services Compensation Scheme (FSCS) up to £85,000, peer to peer loans are not covered by the scheme, leaving investors in danger if their platform collapses.
This doesn’t mean they’re totally at risk, though. Some companies such as Zopa and RateSetter keep funds to repay lenders in the event of default. Investors should still exercise caution, though. As anyone who’s ever struggled to make rent in January after big holiday spending knows, funds can run out. By the same token, a large number of defaults across the board could see even protected loans wiped out.
Borrowers, similarly, should understand that peer to peer lending’s advantages and disadvantages affect their ability to receive and make use of loans, and be as reliable and honest as possible.
So, What Should I Do?
Overall, how safe peer to peer lending is depends on a lot of factors. The type of loan, the amount of money invested, how you split up your investment, the platform you use, and so on.
In addition to researching thoroughly and carefully in line with your own aims and restrictions, the following tips can help ensure you get the best possible results from peer to peer lending.
- Know your platform! Don’t get caught off guard by hidden fees – or, worse, by a company that has no interest or ability to protect your investment or to ensure a fair loan.
- Diversify! You don’t want all your eggs in one basket. It’s generally better to split your funds across different areas, so all your money isn’t exposed to any one big risk. The same applies in peer to peer lending, and one major advantage is the service some platforms offer to automatically diversify your investments.
- Keep an eye out for hidden charges! Research carefully, as some platforms impose additional costs on lenders and borrowers.
- Make sure you can get your money out if you need it! Again, each platform has different rules on how and when you can withdraw your cash. You should make sure you know these back to front for any company you want to invest with.
We hope this summary of peer to peer lending’s advantages and disadvantages has been helpful, and we’d welcome any questions or comments.
As always, the key point here is to be careful! Like online shopping or dating, you should come to peer to peer lending with an open mind and a healthy dose of caution.
Just remember, there’s no such thing as a risk-free investment!