Since the financial crisis, peer-to-peer (P2P) lending websites have exploded onto the scene, offering borrowers lower rates and hard-pressed savers the chance to earn higher returns on their spare cash. But borrowing from a peer-to-peer lender may seem a bit daunting – it's certainly not as well-trodden a path as borrowing from a bank or building society – so what can you expect, and how does borrowing from a peer-to-peer lending website differ from borrowing through a bank or building society?
When you use a peer-to-peer website to borrow, you don't actually borrow from the peer-to-peer provider. Their job is to arrange for their customers to borrow from each other. The people you are borrowing from are the peer-to-peer site's 'savers'. The interest you pay on the loan is the interest they receive on the money they invest.
All peer-to-peer lending websites must be authorised by the Financial Conduct Authority, so in terms of the protection you have, it's no different from borrowing from a bank or building society.
Peer-to-peer lending websites run credit checks on you just as a bank or building society would. These credit checks are "soft" which means they don't impact your credit file.
There will also be other underwriting checks (again just like when you borrow from a bank), which may include verification of the details you provide in your application.
On a peer-to-peer lending website, the lenders are essentially individual investors looking for a better return. They lend their money to other people looking for a loan – hence the "peer-to-peer" name – and charge a set interest rate.
As it's their money, they decide on the type of borrower they would like to lend to, and at what rate. As such, they're often getting a better return than if they'd put their money in a savings account.
Borrowers then apply to the website and are matched to lenders according to their credit profile.
The interest rate you pay will be determined by a number of factors, including:
Although peer-to-peer websites have grown in popularity, this doesn't necessarily mean that you will be accepted.
You need to be a UK resident and at least 18 years of age, and you'll also need to hold a current account and have a minimum number of years' credit history.
If you have previously defaulted on credit before, have CCJs or a tight budget for repaying your loan, you may find it just as difficult to get a peer-to-peer loan as you would a bank or building society loan. In some cases, you may find it even more difficult – these are people lending out their own money, after all, so the lending criteria is often stricter.
As with banks and building societies, different lending sites will have different criteria. Some will only deal with applicants who have the highest possible credit rating – and therefore pose the lowest credit risk – while others will be willing to deal with those who've had credit problems. Rates will be set accordingly, so as with traditional loans, if you're less creditworthy, be prepared for a higher APR.
There are two main reasons why peer-to-peer lending websites can offer less expensive borrowing than high street banks and building societies:
Most peer-to-peer arrangements allow you to pay off your loan early, at any point, at no extra charge – but always check the terms and conditions to make sure.
Yes. Once the credit agreement is in place, the peer-to-peer lending website will register an entry on your credit file in the same way as any other loan. Therefore if you miss payments or default on your credit agreement, this will affect your credit records in the same manner.
If the peer-to-peer website that you arranged your loan through goes bust, you will still need to repay your loan. As the website only acts as a matchmaker, you still owe money to the individual people who lent it to you.
On the flipside, your lenders can't decide to suddenly hike the rate of interest that you have agreed, or ask you to repay earlier. All parties involved have to continue to abide by the terms of the credit agreement.
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.
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