Over the last few years, a new type of lending has been increasing in popularity – peer to peer or social lending. The idea is that people who want to borrow money are matched with those who want to lend it.
What is peer to peer lending?
This is a form of borrowing and lending between individuals, or ‘peers’, without a traditional financial institution such as a bank or building society being involved.
If you want to borrow money, peer to peer websites can match you up with people willing to lend it to you.
The companies that provide these services (called ‘platforms’) act as intermediaries between borrowers and lenders.
Peer to peer lenders can offer lower interest rates than traditional lenders such as banks. Whether or not this is the case for you will depend on certain factors such as your credit rating.
Some of the best deals are only available only if you have an excellent credit history and no previous problems with missed payments.
If you apply for a loan, you’ll be credit checked using a credit reference agency and must pass the peer to peer company’s own checks.
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Pros of peer to peer lending
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- Peer to peer loans can be available at a lower interest rate than what’s offered by banks or building societies, especially if you have a very good credit rating.
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- Some peer to peer websites have no minimum loan amount, which might suit you if you only want to borrow a small amount for a short period.
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- Depending upon your credit rating, they might be an option if you have difficulty getting a loan from a bank or building society.
Cons of peer to peer lending
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Interest rates of peer to peer loans might be higher than high street banks or building societies, depending on your credit rating.
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You might have to pay a fee to the platform for arranging the loan, even if what you’re asking for from any one lender is not the whole amount you want to borrow. This can mean you’ll have to pay multiple fees if you have to apply to more than one lender to cover the total amount you are looking for.
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You might find yourself unable to obtain a loan if you have a poor credit rating or have managed your finances poorly in the past.
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You might not have the same protection through the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS). It’s important to check what protection you do have before you take out the loan.
How much do peer to peer loans cost?
The interest rates on peer to peer loans vary significantly depending on how much of a risk you’re seen as being.
- If you have a very good credit score, you might be able to borrow at an interest rate as low as around 3% but in some cases the rate might be variable, meaning the rate can go up or down each month.
- If you have a poor credit history, your interest rate could be as high as 30% or your application might be rejected.
Peer to peer platforms also generally charge a fee to arrange the loans.
Is your household income getting squeezed?
If you’re facing higher living costs, but have little or no extra money coming in, find out about extra sources of income and support available to help you manage your household bills and save money in our guide Living on a squeezed income
How do you apply for a peer to peer loan?
To apply for a loan, go to one of the lending sites and register, select the amount you want to borrow and for how long.
Then you can see if you’ll qualify for a loan and the interest rate(s) you’ll have to pay.
Peer to peer lenders normally ‘parcel up’ loans between lots of different people. Parcelling up means that a number of individual lenders will each agree to lend a share of the total amount you want to borrow.
Depending on your credit rating and the platform you’re looking at, you might be offered less than you want to borrow. Also, one lender might charge you one rate for the amount they will lend to you but other lenders offering to lend you the balance (or their part of the balance) may each charge different interest rates..
Rules and regulations
Peer to peer platforms are regulated by the Financial Conduct Authority (FCA).
This means that if you have complained to your lender and are unhappy with the outcome – or they don't respond to you within eight weeks – you can contact Financial Ombudsman Service (FOS).
A peer to peer loan is not always covered under the by the FOS, so it’s important you check this.
If they agree the business has done something wrong, they can order them to put things right. The service is free to use.
Find out more In our guide Sort out a money problem or make a complaint
Things to be aware of when applying for a peer to peer loan
Before choosing to apply for a peer to peer loan, be aware that:
- If you default on a peer to peer loan, the company might pass the debt on to a debt collection agency, which will chase it on behalf of the lender or lenders. As a last resort, the lender might go to court.
- Missing payments or defaulting on a loan will affect your credit rating. Once the credit agreement is in place, the peer to peer lending website will register an entry on your credit report in the same way as most other types of credit are registered.
