During the last few years, a new area of lending has begun to emerge and increase in popularity. This “peer to peer” or social lending allows for the connection between people who are willing to lend money, and people who need to borrow money.
Peer to peer lending is a form of borrowing that exists between people, or individuals, without the need for a traditional financial institution such as a building society or bank becoming involved. If you need to borrow cash, the lender’s website for your peer to peer company will put you in touch with the people who are willing to lend for you. This means that the companies associated with these services act as intermediaries between lenders and borrowers.
Often, peer to peer lending can allow for lower interest rates than most traditional loans. However, whether this is true for you will depend on numerous factors, including your credit score. If you apply for loans, you will need to pass a credit check, and also move through specific tests of the peer-to-peer company.
The Benefits of Peer to Peer Lending
If you need to borrow some cash, peer to peer lending can be a lot cheaper than building societies and banks – particularly for people with good credit ratings. Additionally, some peer to peer websites come without any minimum loan amount requirements, which is often a problem with big mainstream lenders. This might mean that this form of borrowing is perfect for anyone who only wants to borrow a small amount.
Peer to peer lending is a useful option for people who have trouble getting the loan that they need from building societies or banks. Additionally, these options mean that you can pay off the amount that you owe early, often without incurring any extra penalties.
What to Remember with Peer to Peer Lending
Although peer to peer lending can be very useful for a lot of people, the interest rates of these loans can be higher than those given by high-street building societies and banks, depending on the credit rating you have. Usually, you will need to pay a fee to the company for arranging the complete loan. Additionally, this will still be an issue if the loan isn’t completely funded by one lender.
If you have a poor credit score, you might also need to work on improving your credit history before you can get access to the lending solution that you need. Remember, there are lots of companies out there that offer peer to peer lending, but the more you try and fail to apply for a loan, the more likely you are to end up with black marks on your credit report.
Applying for Peer to Peer Loans
How much you’ll need to pay out on a peer to peer loan can vary according to your position as a “risk”. For example, if you have a very respectable credit score, then you might be able to borrow at a lower interest rate, though that rate might be variable, which means that it can go up and down each month. On the other hand, if your credit history is bad, your interest could be very high, or you could be rejected from the loan completely.
To apply for a peer to peer loan, you’ll need to visit one of the lending sites that offer this form of finance, and register your information. During this time, you will be able to select the amount that you’re interested in borrowing, and the term that you’d like to borrow for.
Ideally, the lending website will be able to show you quite quickly whether you qualify for a loan, and whether you’ll need to pay significant interest rates. Most peer to peer lenders will parcel the loans between a range of different people to reduce the amount that each has to pay. Depending on your credit rating, you may end up being offered less than you wanted to borrow initially, or you might be offered one amount at a particular interest rate, and then the rest you want to borrow at a different rate of interest.
Regulations and Rules of Peer to Peer Lending
Remember, peer to peer lending is classified as loan-based crowdfunding, and it’s regulated by the financial conduct authority. In other words, this means that you can make a complaint and the business will have 8 weeks to respond. If you’re not happy after that eight weeks, you can connect the financial ombudsman service.
If you default on peer to peer loans, the company will have the right to pass your loan onto a debt collection company that could chase you on the behalf of the lenders. In last resort cases, you may also be taken to court. It’s also worth noting that defaulting on a loan or missing payments can also impact your credit rating.