What’s a peer-to-peer loan? – Part 1


What’s a peer-to-peer loan? – Part 1

Peer-to-peer (P2P) loans are a relatively new way of borrowing money. They are unsecured personal loans, but instead of borrowing from a bank or other financial institution you are borrowing from people like you, via an intermediary, such as Zopa or Ratesetter.

If you want to borrow…

Borrowing from a P2P lender is exactly like taking a personal loan from a mainstream lender.   The intermediary handles the application process, credit checking, approving or declining your loan, sending you the loan and collecting repayments.

To apply you simply visit the P2P lender’s website - such as those mentioned above. You won’t be able to apply in branch as peer-to-peer intermediaries don’t have a presence on the high street.

As with any other unsecured loan, when you apply you’ll need to state how much you want to borrow and for how long. For instance, Zopa offers loans of up to £25,000 from 1 – 5 years. You’ll have to share personal information about yourself, why you want the loan and your income. They’ll then look at your credit history before deciding whether to accept or reject your application. The interest rate that you will pay on the loan and the fee that the lender will charge you will depend on your individual circumstances.

As with any borrowing, you shouldn’t rush in without thinking through whether you really need to borrow the money, and whether you can afford the repayments – not just now but if your circumstances were to change over the life of the loan.  Falling behind with your repayments can damage your credit record (which may make it harder and more expensive to borrow again in future) and you may face additional interest and charges.

So what makes P2P different then?

As a borrower there is little practical difference between a P2P lender and any other unsecured personal loan.  But in the background how it works is a little different.  If you take a loan from a mainstream lender you are borrowing money from them.  If you borrow from a P2P lender the money you borrow has actually been funded by potentially dozens of people – just like you- who have spare money that they want to put to work.  Your repayments (and the interest) are split amongst all of those people – but at no point do you have to find out who they are (nor do they find out your details), and you never deal directly with them, only with the P2P firm.

If you want to invest…

In part 2, we’ll be looking at peer-to-peer loans from an investor’s point of view so if this is what you’re interested in please make sure you come back tomorrow to check it out.