Peer-to-Peer Lending – Is it Right for You? Can you lose money? Read the full guide now!

By | Last Updated: 14th September 2019 | This post may contain Affiliate Links

Innovative finance can also be known as Peer-to-Peer Lending (P2P for short), this is a modern way for people to lend money.

It can be used for both individuals and businesses alike, however just like with most ‘investments’, lending can obviously be risky as well as rewarding.

In basic terms peer-to-peer lending is designed to ‘bring’ people and businesses together, those that want to lend money and those who want a loan. For the ‘lenders’ they receive interest on the amount of money they’ve invested, for the ‘borrowers’ they get access to a loan without needing to use a bank or building society.

Usually you’ll need to use a ‘platform’, this is a third-party entity which acts as an intermediary between the lender and the borrower. In addition, p2p lending can be attractive as the interest rates can be lower than a traditional outlet. Though, the ‘best deals’ are usually only available to people or businesses with an excellent credit history.

In addition, you’ll normally need to pass a credit check to loan money and you’ll also need to ‘pass’ whatever rules and stipulations the p2p company has in place too. This varies massively from each platform, so you’ll need to compare before making a final decision about which one to use.

How to Get Started with P2P Lending in England

In most cases its fairly easy to get started with UK peer-to-peer lending, if you want to LEND money you’ll typically:

  • Open an account with a P2P platform – you’ll need to verify who you are and after all the checks have been completed, you can deposit money. This is usually done either by a bank transfer or by a credit card. Some platforms may have multiple other payment methods.
  • You then set the interest rate you want to receive for your money
  • You also must set the amount of time you would like to lend the money. So, for example this could be two years, three years or more. Equally it could be lower too.
  • You don’t always have to ‘look’ for potential borrowers, some platforms will have an ‘auto bid’ feature, while other platforms will ‘connect’ you with borrowers automatically.

It’s important to note, that you MUST read all the terms and conditions of the P2P lending platform, some charge fees (such as 1% of the interest earned) to use their service. All platforms are different, and there’s no ‘general rule’, so it’s vital to figure out what works for your situation.

What are the Pros and Cons of Peer to Peer Lending?

Like most things in life, there’s advantages and disadvantages to P2P lending in the UK. Lots of investments can be risky, from purchasing a house to buying stocks and shares. Let’s dive in to find out what the pros and cons of peer-to-peer lending is.

The Pros:

  • For the borrower, it can be ‘easier’ to lend money on a P2P platform, than visiting your bank and building society.
  • Depending on your credit rating, you can get ‘cheaper interest rates’ when compared to traditional loaning methods.
  • Some P2P platforms have no minimum loan amounts
  • If a borrower can’t get a traditional loan from a bank or building society, P2P lending can be an alternative option
  • For a lender, you can decide how much money you want to lend.
  • You can even choose the duration of the loan. For example, 1 Year, 2 Years, 5 Years and so on.
  • You can also set the interest rate you want to receive.

P2P Lending

The Cons:

  • Depending on the lender, the interest rates could be higher than a traditional bank.
  • If the borrower has a poor credit history, they may not get a loan.
  • Both the lender and the borrower normally have to pay a ‘fee’ to the P2P platform. This can vary a lot from each company, if a borrower applies for more than one loan, they may have multiple fees to pay.
  • You may not have the same UK protection when lending from a Bank or Building Society. Some peer-to-peer platforms might not be based in England, they could be located anywhere in the world.

It’s also important to note that ‘defaulting’ on a loan will generally be treated in the same manner as defaulting on a bank loan. It will usually get ‘passed’ to a debt collection agency, which may end up in court.

Equally missing a payment might also affect your credit rating. Read all the terms and conditions from the P2P platform, as once you’ve agreed a loan, they may be able to register an entry on your credit report. Just in the same manner a Bank or Building Society would.