Peer-to-Peer finance can make (& save) you money

By Charlotte Yau

There is a new way of getting a loan, one where bankers don’t have the last laugh. It’s called peer to peer lending.

It involves, indirectly, borrowing money from a member of the public; someone who has a bit of spare cash lying around and who is happy to lend it to you for however long you want.

Peer-to-peer (P2P) lending firms bypass traditional institutions such as high street banks, by allowing people to do exactly this, directly lend and borrow cash to/from one another. As a lender, you earn decent interest on your money, potentially more than you would with a savings account, and as a borrower, you could get lower interest rates than elsewhere on the market and avoid those pesky bankers.


So how does it work?

Much like AirBnB or Task Rabbit, which are revolutionising the way we access services and products, P2P lending works by matching people who have money, with those who need it.

For borrowers, it’s simply another credit option and one which may come with a lower interest rate than anything being offered by traditional lenders.

Those with money to spare can put up from £10 up to £10million and beyond if they like. Their cash gets distributed to a number of borrowers and they essentially pocket some of the interest paid on the loan.


How does a P2P loan compare with that of the banks?

P2P firms don’t have the same overheads as banks so they’re able to pass on these savings in the way of good rates. Often there is no early repayment fee, unlike many banks.

Many also only do ‘soft’ credit checks when accessing your suitability, which means that getting a quote won’t affect your credit score.

For example, at time of writing, P2P lender Ratesetter currently advertises a representative APR  of 7.4%. Zopa has a representative example of 9.9% APR for a loan of £7,500.



What if I want to become a P2P lender?

Well, you can choose the type of lending option you want – one with almost no risk or one that’s a higher risk. The longest lending option also has the best return. All in all, you can earn from 2.8% to as much as 7.2% on your money.

Because your cash is dispersed to a number of different debtors, the risk of not being paid back is mitigated and many of the big firms say they have a contingency fund to protect lenders in this situation. You obviously won’t have to don a puffer jacket and go knocking on debtors’ doors. They’ll do the legwork in clawing the money back if they have to.

You can lend for a period of one month up to five years, but you can always take your money back out early if you need to, though there might be charges if you want to get your money out early.

Peer to Peer lending also comes under the new personal savings allowance (PSA), which means you can earn up to £1000 interest in a year without having to pay tax on it.

As of April 2014, P2P firms became regulated by the Financial Conduct Authority, which means that they are now required to be upfront and transparent about the risks and costs involved. For borrowers, that’s knowing what kind of APR you can get, while for lenders it’s knowing that there is no Financial Services Compensation Scheme (FSCS) protection.

If a P2P firm goes bust it’s not definite that you’ll get your money back. FSCS said in April of this year that it may be able to award compensation on bad advice you receive about P2P lending, but it does not cover loss caused by bad investment performance.

Another thing to be aware of when thinking about peer to peer lending is that your money may not be lent out as soon as you make it available. Meaning during this time you will not be earning any interest on it.




Top Takeaway

P2P loans may have a lower interest rate than those offered on the high street. If you have a quote from a bank, try getting one or two from a P2P lender to see how they compare.

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