For some reason, back loans have always been complex for many people to secure. From the piles of paperwork to be signed to the not-so-transparent interest rates and charges on bank loans, they are usually people’s last resort when it comes to securing loans.

Nevertheless, “peer-to-peer” (P2P) lending which some people see to be a better alternative to bank loans seems to be growing in popularity over time.

What Is Peer-to-peer Lending?

This is a type of lending is where loans are raise from peers (other users of the platform). Thus, instead of a person walking to a bank to secure a loan, a peer offers them that loan on the P2P platform.

Though new to many borrowers, peer-to-peer lending holds many potentials to become one of the most preferred forms of accessing capital.

This is because of the potential benefits or advantages P2P lending offers over other traditional forms of lending. 

Benefits Of Peer-To-Peer Lending:

Faster and smoother online application process:

One of the best things about peer-to-peer lending has over lending from banks is how fast and convenient its registration process is. The entire process is done online, just from the comfort of your home. Moreover, the automated matching of a lender with a borrower gives P2P platforms a quicker turnaround time to get a loan.

Interest rates may be lower:

Overhead costs contribute to the high-interest rates of traditional bank loans. Considering the fact the there are no overhead costs like in typical bank lending, as lenders directly lend to borrowers on the platform, both the lender and the borrower are likely to enjoy much fairer rates.

Your credit score is not affected in an initial quote:

Unlike in a traditional bank loan where deep tracking of your credit score is almost required every time to secure a loan, most P2P platforms offer a safer “soft search” when you initially personalised a request for a quote. Due to the nature of the soft search, it does not show up on your credit history until you accept the quote, which lets it be recorded on file.

This means you can access your affordability of a loan even with a weak credit score.

The P2P platform serves as an intermediary:

In peer-to-peer lending, you borrow money directly from a peer on the platform. However, the P2P platform plays that intermediary role of ensuring everything is done perfectly. Thus, you do not have to know a lender or borrower in person nor communicate with them privately to secure a loan. In most of the P2P platforms, both the borrower and the lender remain anonymous while the platform does everything in-between, from the processing of loans to disbursement as well as following up on repayments.

P2p loans are more flexible:

From following an automatically chosen repayments terms to choosing a preferred repayment term, a borrower gets to pay the loan on their preferred terms with no extra or hidden costs attached. This is a far preferable option to a traditional loan, which are less flexible and based on the bank’s terms.

No need for a collateral:

Unlike bank loans, P2P loans are unsecured. That means you are not tied to the offering of collateral to access it. In addition, if you have a good repayment record, you are likely to raise funds much quicker and cheaper over time.

Can Be An Add-on Lending Alternative:

Sometimes, when you need an extra more for some personal expenses, which may not be likely granted by a bank, you can fall back on a P2P loan to offer you that alternative loan source. 

From these many benefits of a P2P loan, it only gets one excited about trying it. Nevertheless, there are some downsides to P2P that need to be taken into consideration too.

Challenges or Disadvantages of P2P Loans:

Your credit score is still required:

Yes, you may not need a credit score to assess how much you could get in an initial quote. However, once you accept the offer, the platform usually goes further to run credit score checks on your profile, as well as some internal checks. Through this required step, the P2P platform can identify possible loan defaulters ahead of time and also get to secure lenders funds. Therefore, like any other loan facility, it is critical to building a good credit score before applying.

Application fees and penalties may apply:

Just as you would be required to pay a loan arrangement fee at a bank, you may be required to pay a similar fee on most P2P lending platforms too. Ideally, as an intermediary, the P2P could charge you a commission on successfully connecting you to a lender. However, P2P platforms usually charge flat fees, which are usually split into two: partly to cover their overheads and partly to contribute to a form of “security fund” (used to compensate for any defaulting or loan repayment delays). The cost however may depend on the amount you are borrowing, the loan duration and sometimes your credit score. These fees are usually built into your loan so you are not charged upfront.

You may not get the entire amount needed instantly:

To reduce risks on P2P platforms, funds are usually limited, especially for new borrowers and borrowers with weak credit scores. Besides, as a peer-to-peer platform, a peer (or peers) should be willing to offer the loan, as you do not borrow directly from the platform. These two reasons may make it difficult to secure relatively bigger loans for bigger projects. Some P2P platforms may offer loan levels for borrows to go through, as they get to receive bigger loans as they repay the smaller ones on time.

Bringing it all together, peer-to-peer lending is undoubtedly a new and innovative way of accessing loans that are becoming popular over time. They offer many benefits from a quick application process to flexible loan repayment terms that seem to make life easier for the borrower. However, there could be some negatives with them too such as payment of application fees and access to limited funds. A promising as they seem, it will only take time and experience with these platforms to know whether they are for you or not.

Links that may help you

View our other similar article on P2P lending

We recommend looking at Zopa and Funding Circle as top UK p2p websites