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If you need to borrow money to finance a car purchase or home improvements, there is another option alongside the traditional bank and building society providers: peer-to-peer lenders.
Also known as P2P lending, this type of finance makes up a small portion of the loans market, but it may be an option if you are looking to borrow money, depending on your personal circumstances.
However, some of the biggest P2P lenders have withdrawn from the market recently, including Zopa and Ratesetter, so the choice is limited. There may be better ways to borrow money, too, particularly with personal loan rates from banks and building societies currently closest to the lowest they’ve ever been. Find out more about other ways to borrow in our article Balance transfer credit cards and personal loans compared.
How does peer-to-peer borrowing work?
Peer-to-peer lending is a relatively straightforward concept. It’s similar to other types of lending, but instead of borrowing money from a bank or building society, this comes from individual investors.
You request a loan, and this may be provided by an individual willing to lend you the money in return for interest. Lenders are matched directly with borrowers through the P2P website, also known as a platform. Interest rates can be competitive if you have a squeaky clean credit history, but this isn’t necessarily always the case, and there will be arrangement fees to pay, so factor these in when applying for a loan. For this reason peer-to-peer platforms will often only offer to provide loans to those with strong credit ratings as they pose the lowest risk of defaulting on their loans.
If you are interested in lending money through P2P lenders, in return for interest, have a look at our article Peer-to-peer lending – is it a good investment?
You can usually borrow anything from £1,000 to £35,000 over a period of between one to five years with interest rates between 3% and 29%. However, it’s important to check what rates are available elsewhere, as personal loan rates are currently relatively competitive.
There are fees to both lenders and borrowers for the administration and management of the loans, so check these carefully.
Is peer-to-peer borrowing safe?
P2P lending has received some criticism over recent years, with the Financial Conduct Authority (FCA) stating it is a “high-risk investment”. This has prompted some major providers to exit the market, including Zopa, which had millions of customers both lending and borrowing money. Some smaller providers have also collapsed over recent years, which has added to the turmoil faced by the P2P sector.
However, from a borrower’s perspective, P2P borrowing is relatively safe as the majority of risk sits with the lenders who could face issues such as defaults, difficulty withdrawing their funds as well as platforms folding and taking their money with them.
What if you are struggling to borrow money?
If you are struggling to get a loan it could be worthwhile taking some time to understand the reasons why before moving on to the next application. Looking at your credit score might make getting approved a little easier. Read our article Seven steps that could improve your credit score for some suggestions on how you can boost your score. Tackling any debts you already have is also important. Have a look at our article How to take control of your debts for so steps you could take.
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