Peer to peer loans are an alternative to borrowing money from traditional financial institutions such as banks.
Here, we explain how they work and other lending options available if you need to borrow money.
What is a peer to peer loan?
A peer to peer loan allows you to borrow money from a pool of private individuals, or “peers”, rather than a mainstream bank or building society.
They’re similar to traditional personal loans in that you can borrow a fixed sum of money and will have to repay it with interest.
How do peer to peer loans work?
Peer to peer lending websites, or “platforms”, match borrowers with people willing to lend to them.
To apply for a peer to peer loan, you will need to complete an online application form, detailing how much you want to borrow and for how long.
As with traditional personal loans, your credit score will determine whether your loan is approved and the amount of interest you have to pay.
Generally speaking, borrowers with higher credit scores are more likely to have a loan approved and will pay a lower rate of interest.
Borrowers with lower credit scores may have to pay a higher level of interest or could have their loan applicationss rejected altogether.
Lending platforms usually charge a fee to arrange a loan, which will be factored into the repayments.
What are the benefits of peer to peer loans?
Overall, peer to peer loans can offer lower rates of interest compared to the rates available from traditional financial providers such as banks.
Peer to peer lending is completely internet-based, meaning platforms can minimise their operating costs. Lenders are able to pass this saving on to their customers through lower interest rates.
Furthermore, peer to peer loans offer greater flexibility and most lenders allow you to choose your loan term. They also allow you to pay off your loan sooner without incurring early repayment charges.
Some lenders don’t have a minimum loan amount, which could allow you to borrow smaller amounts of money for a short period.
What happens if you miss a payment?
As with mainstream personal loans, missing payments on your peer to peer loan will affect your credit score. This could make it harder for you to take out more credit in the future.
If you default on your repayments, your details may be given to a debt collection agency. They will then try to reclaim the money on your lender’s behalf.
In extreme cases, you could be taken to court in order to retrieve the money you owe.
Alternative ways to borrow money
If you need to borrow money, there are a couple of alternatives to peer to peer loans that could help.
A personal loan is an agreement to borrow a sum of money which must be repaid over a set period. These loans don’t require you to offer your personal assets, like your car or home, as security.
Most mainstream financial providers, such as banks and building societies, offer personal loans.
Your credit score will be used to determine whether or not your loan application is approved and the interest rate you’ll pay.
Credit union loan
A credit union is a non-profit financial organisation that offers savings accounts and loans. Members pool their savings together to lend to each other and help run the organisation.
Credit unions tend to offer loans with lower interest rates and are a good alternative to mainstream banks.
You’ll need to be a member of a credit union to be able to get a loan or savings account. Find Your Credit Union can help you locate credit unions near you.
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