Peer-to-Peer (P2P) loans is a relatively new form of borrowing and lending outside of the traditional financial institutions. As a new sector of the economy, peer-to-peer loans carry more risk than borrowing and lending in the usual way. However, with these risks can come high rewards, as peer-to-peer lending is digital and avoids the normal overheads a bank or building society would have. Therefore, the best way to view peer-to-peer lending is as an investment as opposed to savings. This guide will take you through how these digital loans work and allow you to compare peer-to-peer with other loans to help you make the best choice for your financial situation.
Peer to Peer lending is a way of borrowing money without having to go through a bank. Peer to Peer lending websites are essentially a digital marketplace, linking people and business that want to lend or borrow money, in many ways these websites act like a financial matchmaker. As a lender, it is similar to putting savings into a bank apart from one crucial difference, there is the possibility of losing money. As a borrower, it can be useful for those who have struggled to get a personal loan elsewhere, although you are not guaranteed to be accepted.
Because peer-to-peer lending operates through many different websites, there is no one single way in which they work. For instance, some will allow you to choose who you lend to, whilst others will make you spread out your investment across multiple borrowers.
If you are borrowing, you will be checked with a credit reference agency and pass the websites own tests. It’s often the case that peer-to-peer lending can be used by those who would otherwise be refused a personal loan. If you are lending, some websites will allow for you to use these credit scores to decide who to lend to. If you are lending money, it’s important to remember that you will have to report to HMRC how much interest you have made as it falls under taxable income.
If you are seeking to lend money, it’s generally speaking quite straightforward. You simply open an account with a peer-to-peer lending website and set the interest rate that you would like to receive or the one that’s on offer, and the lend for a fixed period of time.
Peer to Peer lending is a very risky business, and if you are looking to just safely accumulate interest on savings then this is not for you. However, if you see it as a risky way of increasing capital then it can be very effective. It’s important to understand the risks and what to look out for when you are comparing loans and lending.
Find out which loans you could be eligible to take out, without affecting your credit score