Guide to Peer to Peer Loans

Guide to Peer to Peer Loans
December 22, 2015 Cash Lady
peer to peer loans

Peer to Peer Loans: One Man’s Treasure

There’s a well-known saying that tells how “one man’s trash is another man’s treasure”. It suggests that something that you don’t want or need could be exactly what someone else is looking for. What about “one man’s treasure is another man’s treasure”, instead? See our guide to peer to peer loans in the UK.

Could two or more people benefit from the same pot of money? With peer to peer lending, it’s possible.

What exactly is peer to peer lending?

One person, with excess funds, can lend their money to someone else. They’re an individual providing a loan, with the risks and benefits associated. Often the reward is a higher level of interest – something that your high street bank can’t compete with.  Even so, there will always be the possibility that the borrower can’t pay back what they owe.

For the borrower, peer to peer lending can be an alternative to a short-term loan, without the high-interest rates that can lock them into a debt cycle. The interest payable is often higher than a typical bank’s interest rate on savings. This is why it benefits the lender, but is significantly lower than the four-digit rate that a payday loan company might quote.

What protection does the lender get?

Of course, it would be frivolous to lend money to a stranger on the street. This is why peer to peer lending is best done through a reliable and trustworthy middleman. A lender’s money is typically spread between multiple borrowers, to minimise the risk.

The process is simple:

If five people each request a £1,000 loan, then your £1,000 might be split and given as a £200 contribution to each. Four other lenders would each contribute the same. This means that each would stand to lose only £200 if only four people repaid their debt. That’s significantly better than a full £1,000 loss if the money had not been split! This principle typically works on a significantly larger scale. Splitting funds and spreading the money to a much larger pool of borrowers, so that the losses are even smaller (if indeed they occur at all).

What can you use a peer to peer loan for, as the borrower?

It’s really up to you! Peer to peer loans can be an alternative form of funding for many people that might otherwise get caught up in high-interest payday loan agreements or might end up dealing with a loan shark.

If your credit rating is particularly low then you might struggle to find a suitable peer to peer loan. With a slightly higher credit rating, you may be able to get hold of money to buy a car, to fund your wedding or to consolidate existing debts.

Who will provide your peer to peer loan?

Peer to peer loan providers

There are a number of companies that work as the middleman, collecting the money from lenders and handing it responsibly to borrowers. Here are just a few of the most popular places to try:

Zopa

Zopa is the UK’s best-known peer to peer lending service.   Consecutively it won awards for ‘Most Trusted Personal Loan Provider’. Lenders can start by investing as little as £10, though the typical starting figure is around £1,500.

Zopa borrowers must have an income of at least £12,000 per year and must be at least 20 years old.

  • Zopa offers loans from £1,000 to £25,000.
  • There are no early repayment fees, so borrowers can repay their debts early.
  • Loans are available over periods of up to 5 years.
  • Advertised Zopa loan rates are up to a maximum around 8% APR.
  • Loan decisions within 48 hours.

RateSetter

RateSetter is one of the larger providers of peer to peer loans in the UK. It has partnered with companies such as giffgaff to offer stand-alone loans. It also supports people that buy new mobile phones on credit. Lenders can invest for as little as 1 month at a time or can lock their money in for 5 years for the maximum return. The minimum investment amount is just £10.

RateSetter borrowers must have a regular income and must be at least 21 years old.

  • RateSetter offers loans from £1,000 to £25,000.
  • There are no early repayment fees, so borrowers can repay their debts early.
  • Loans are available over periods of up to 5 years.
  • RateSetter advertises loans at representative 7.2% APR.
  • Loan decisions within 24 hours.

Lending Works

The minimum investment amount is £10. Lending Works Shield offers additional protection for lenders. With the Shield, repayments happen even if a borrower hasn’t kept their end of the deal.

Lending Works borrowers must have a regular income and must be at least 20 years old.

  • Lending Works offers loans from £1,000 to £25,000.
  • There are no early repayment fees, so borrowers can repay their debts early.
  • Loans are available over periods of up to 5 years.
  • Lending Works advertises loans at up to 21.7% APR, with a representative 5.3% APR.
  • Loan decisions within 48 hours.

QuidCycle

peer to peer lendingQuidCycle offers the QuidCycle Provision Fund, to protect lenders from non-repayment. There are a number of investment options for lenders, but the minimum investment is for the RegularInvest package. This involves a required contribution of £100 per month. Lump Sum investments start at £500.

  • QuidCycle offers loans from £2,500 to £25,000.
  • Borrowers must have a regular income and must be at least 21 years old.
  • There are no early repayment fees, so borrowers can repay their debts early.
  • Loans are available over up to 5 years.
  • QuidCycle advertises loans at representative 6.2% APR.

Is a peer to peer loan right for you?

For a borrower, peer to peer loans are much the same as a typical bank loan or a payday loan. The benefit is usually of relatively low-interest rates and a fast decision. Often, money can be in the borrower’s bank account within hours of a loan application. Peer to peer loans are also an alternative to more traditional forms of finance. You may get accepted for a loan application that your bank would have automatically rejected. Peer to peer lending can be a cheaper alternative to UK Payday Loans if your credit rating is relatively good.

Lenders are at risk of losing some of their investment.  A combination of provision funds for protection, and investments spread across multiple borrowers will help to minimise this risk. If you’re planning on lending money through a peer to peer service then you may wish to start with a small investment.  You can add more money once you feel comfortable about your decision.