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How does peer-to-peer lending work?
Peer-to-peer (P2P) lending might be a borrowing option you’re hearing mentioned more and more – but how exactly does it work?
Read our blog for a straightforward explanation.
Lenders like you
Peer-to-peer lending works just like an unsecured loan from a traditional lender, with one big difference. Rather than you going to a bank or other established lender to take out the loan, the money comes from people like you.
You won’t actually deal with the people lending to you directly. This is all done through an intermediary.
Man in the middle
The three largest P2P companies in the UK are Funding Circle, Ratesetter and Zopa. Funding Circle deals only with matching investor funds to businesses, but the other two also facilitate lending to individual borrowers.
However, while the lending and borrowing is done via an intermediary, the interest charged on a P2P loan can be much lower than on a traditional personal loan. Part of the reason for this is that, unlike a high street lender, P2P lenders don’t have high overheads to fork out for, like offices and employees.
A further benefit of P2P lending is that you may be able to agree a more flexible term for your loan repayments. And if you come into some money further down the line, it might be possible for you to clear the loan without paying a charge to do so – which isn’t always the case with mainstream lenders.
How do I apply?
It all depends on the intermediary you choose. However, applying for a P2P loan is much the same as applying for any unsecured loan.
You will need to provide information on your personal circumstances, your income and your financial commitments, and your credit history will be looked at. If you have had trouble managing credit in the past and have missed or been late making payments, this could stand against you when you apply for a P2P loan – just as it would if you went to a mainstream lender.
And if your credit history is less-than-perfect, you should expect to be charged a higher rate of interest if your application is accepted. Again, this is no different from what would happen if you applied for a personal loan on the high street – although an established lender may be more used to taking the risk of accepting a borrower with a patchy credit history.
What happens next?
When you take out a P2P loan, you will agree to pay back a set sum plus interest each month. This is a contract and you must stick to your side of the deal, just as you would with any form of borrowing.
Once you receive the funds, you’re free to spend them as you wish.
What about the repayments?
The repayments on a P2P loan will work in exactly that same way as they would on a personal loan. Your repayment will go out of your account every month to cover part of the money you borrowed and the interest.
If you’re late with a repayment or miss it altogether, the risk is just the same as it would be with any lender. Your credit history could be damaged, which will make it tougher and more expensive to borrow again in the future. And you may also have to pay a penalty to the lender.
That’s why it’s vital you keep up with your repayments. Don’t make the mistake of thinking that P2P lenders are a softer option than mainstream lenders.
We hope this blog has answered any of the questions you may have had about peer-to-peer lending. Keep checking back for more answers to some of the most frequently asked financial questions.