What is a peer-to-peer loan?

How do P2P loans work?

P2P loans work by putting the lender in direct contact with the borrower, with neither using a bank or building society. P2P companies – often website platforms – match up those who need to borrow money with those who will lend it. There may be several lenders. It is a form of crowdfunding.

While it’s an alternative finance option, they work in a similar way to a bank loan. Lenders charge the borrower an interest rate. In theory, because there is no bank involved, the borrower could receive a cheaper rate of interest as there is no bank fee.

How much can you borrow?

These days you are unlikely to be able to get a P2P personal loan. It its heyday, Zopa would lend up to £35,000. But Zopa converted to a bank and no longer offers P2P loans.

Qualification criteria

Only certain businesses have access to peer-to-peer lending. The qualification criteria for a P2P loan will depend on the platform you’re looking to borrow through. Each lends to different types of business and for different purposes.

Application process

The application process will depend on the P2P platform but most follow this format:

• Register with a P2P firm by entering a few personal details.
• Select the amount of money you would like to borrow, and the time frame for paying it back.
• You will have to give some details to the company so it can confirm who you say you are.
• The lender will check your credit worthiness and it may ask you extra questions to assess whether or not you can afford to repay the loan.
• If it accepts you for the loan, you will be told the interest rate, the length of the loan and any extra charges.
• If you go ahead the money will be transferred to your bank account and you’ll usually start making monthly repayments.

Are P2P loans safe?

P2P loans are generally considered to be a safe way to borrow, because peer to peer finance companies in the UK are covered by Financial Conduct Authority (FCA) regulation.

Before borrowing a P2P loan, you can always check the FCA register to see if the lender is on it or not.

However, P2P firms are not covered by the Financial Services Compensation Scheme (FSCS), which protects up to £85,000 of a person’s money if a financial institution goes bust. Most peer-to-peer finance companies do have reserves in place to safeguard borrowers’ money.

How to choose the right peer to peer loan

The P2P loan you choose will depend on what your business is, what you need the money for, how much money you are looking to borrow and how fast you can pay it back. The following checklist is a good place to start when deciding which loan to go for:

1. First calculate how much you want to borrow and see which P2P loans are available to you.
2. Next, check the company’s credentials. There should be information on the firm’s website about where the money you’re borrowing has come from, such as if it’s from a property company or a small business.
3. Check the firm is on the FCA register and also look at customer reviews such as on Trustpilot before you make a final decision. This can be a good indicator of the type of firm it is, and how it will treat its customers.

Interest rates and fees

You will be charged interest on a P2P loan, and you will be told the rate before you agree to take out a loan. It might be possible to get a cheaper interest rate than the mainstream banks offer.

There may also be fees to pay, which should also be outlined before you agree to borrowing any money. There could be fees for late or missing payments, and there may be a fee to sign up to a peer-to-peer finance company as well.

Repayment terms

Most P2P loans will be repaid over one to five years. When you take out the loan you can set how long you would like to pay it back. You will make monthly repayments during this term and by the end of it the loan will be paid off.

Lender reviews

It’s worth checking out a lender’s reviews as this is where its customers can share their experiences. If you can’t easily find any reviews, this should be a red flag.

Protection and support

Peer-to-peer finance companies are relatively new compared with traditional banks, but any company you borrow money from should be registered with the FCA. You can also find information on the company’s website about the support it offers, such as to borrowers who are unable to make their repayments.

Can you get a peer-to-peer loan with bad credit?

P2P loans are not generally available to individuals any longer. Individual businesses will need to check with the relevant crowdfunding platform.

What are the benefits of using a P2P lender?

There are potential benefits to using peer-to-peer finance for borrowing:

• They can offer cheaper rates of interest on loans than banks or building societies, as you are borrowing directly from another person or company.
• P2P loans are unsecured, so there’s no risk of your asset being seized if you default on the loan.

Are there any risks?

Some of the risks around peer-to-peer finance for a borrower include the following:

• If you can’t pay back a loan, the lender may pass it onto a debt collection agency and take you to court.
• There are often fees for late payments, but you also have to pay a fee for joining some platforms.
• If you’re using a new company, there may not be much information available about it or customer reviews.

P2P lending: FAQs

Will a P2P loan affect my credit score?

Any type of credit you take out will affect your credit score, including a P2P loan.

What is the difference between a personal loan and a peer-to-peer loan?

A personal loan is usually taken out from a bank or building society and the borrower pays back the money to the company each month. A peer-to-peer loan works through an online company, which matches the borrower and the lender. There is no ‘bank’ arranging the process. This means the loan should be cheaper for the borrower and the lender can earn a higher interest rate, although neither of these are guaranteed.

What happens if you don’t pay back a P2P loan?

If your organisation isn’t able to make your payments, or you’re late with a P2P loan payment, you will often be charged a fee and a negative mark will appear on your credit record. If you continue to miss payments, in the last-case scenario a lender could take you to court for the money you owe it.

Is peer-to-peer lending illegal?

UK peer-to-peer companies have been regulated since 2014 by the FCA and it is legal to borrow from one, but it’s important to check the details of any company you apply to take credit from.

Is P2P lending a good way to make money?

Using a peer-to-peer finance company to lend money can mean you can earn a higher interest rate than a bank savings accounts or investments. Some companies will also let you use an innovative finance ISA (IFISA), which means your interest will be tax-free, up to a yearly limit. However, it is a form of investment and there are no guarantees your money will be returned or that you will make a profit on it.

Summary: Peer-to-peer loans

The peer-to-peer finance industry has come on in leaps and bounds since it first started and now it is regulated by the FCA. As a result, consumer P2P lenders either converted to banks or ceased lending to individuals. It is now reserved for commercial lending.