In the financial world, a new method of lending has become very popular known as social lending or peer to peer (P2P) lending. In p2p lending, borrowers are matched with lenders.

What is Peer to Peer Lending?

P2P is a type of lending and borrowing between individuals, without the role of any conventional financial organization like a bank. If you need to borrow money, then p2p platforms can match you with potential lenders. Peer-to-peer companies (platforms) function as intermediaries between lenders and borrowers. These platforms offer low-interest rates compared to traditional loans. However, it still majorly depends on specific factors like your credit score. If your credit history is good with no previous issues, then you can get some great deals. When you apply for a loan, your credit is checked, and it has to pass the peer to peer lending assessment.

Cost of P2P Loans

The interest rate on the peer to peer loans can significantly differ based on how much of a risk you pose to the platform. If your credit score is good, then you might get a loan for as low as 3% interest rate. However, in some circumstances the right may vary, meaning that the rates can go higher or lower every month, hence you will have to check. But, if your credit history is poor, then your loan interest rate might get as high as 30%, or you could be rejected.

Remember, that most P2P platforms typically have a fee for arranging loans.

Things to Be Aware of When Applying

Before you apply for a p2p loan, consider a few things:

• Missing a payment or defaulting on a p2p loan will negatively impact your credit rating. Once the credit agreement is in place, the p2p lending platform will register entry on your credit report just like other loans.
• If you default on a p2p loan, then the platform may pass on the loan to a debt collection agency that chases the loan on behalf of the lender. There is a possibility that as a last resort, it might go to court.

Rules and Regulations

P2P companies and individual lenders are regulated by the Financial Conduct Authority (FCA), meaning if you are not satisfied, then you can file a complaint. The company gets eight weeks to resolve the issue. If after eight weeks you are still unsatisfied, then you can get help Financial Ombudsman Service (FOS). The FOS has the authority to resolve the complaint between you and the company you are unsatisfied with. If FOS agrees that the company is at fault, then they have the power to order the company to put things rights. This service is free to use.

The P2P Finance Association (P2PFA) is the industry body for UK p2p finances. This was created to ensure standards in this rapidly growing industry. All the members need to adhere to the rules and regulations set up by the association.

P2P Lending Benefits

• If you wish to borrow funds, peer to peer loans can be a cheaper option than building societies or banks, mainly if your credit rating is excellent.
• P2P lenders have another option if you can't get a loan form a building society or bank, depending on your credit rating.
• Some p2p platforms have no minimum loan amount compared to banks. This works best, especially if you want to borrow a small amount for a short time period.

P2P Lending Drawbacks

• Peer to peer loans interest rate may be higher than high street building societies or banks, depending on your credit rating.
• Almost every p2p platform charges a fee for arranging loans. You may have to pay the fees multiple times in you apply for a loan more than once.
• You may not be able to get a loan if you a bad credit rating or have managed your finances poorly.
• You will not have the same protection with the p2p platform as you do with other institutions. This varies depending on how the loans are drawn up and who the lenders are. For instance, whether they are private individuals or institutional investors. You will have to ask the company how this works and how it is different from a conventional loan.

How to Apply for a P2P Loan

If you want to apply for a loan then first you have to find the right lending site and register yourself. Then you can select the amount you wish to borrow and the term. Then you have to wait and see if you get quality for a loan and the interest rates that you will need to pay. P2P lenders usually ‘parcel up' the loans among different people. According to your credit rating and the platform you choose, you may be offered less than you need to borrow or you may be offered a specific amount at one interest rate and different interest rates by other lenders.

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