Peer-to-peer lending (P2P) has got a lot of attention recently and a number of headlines in the news. However, this has been driven by the announcement of plans to allow P2P loans to be placed into ISAs for tax-free returns, so most of the media coverage has focussed on the point of view of the lender. But what about taking out a peer-to-peer loan? Is the prospect as attractive for borrowers as it can be for lenders?
Who can Take out P2P Loans?
The question of who exactly is eligible to apply for a peer-to-peer loan depends very much on the provider. Some only cater to small businesses, while others also provide loans for individuals. They also have varying acceptance criteria. For example, some will only accept individuals with a very strong credit rating, while others will accept those who don’t have quite such a stellar history (albeit requiring higher rates to compensate their investors for the higher level of risk). If you don’t think you are eligible for one provider, don’t let that stop you looking for another that seems more appropriate.
Note, however, that most P2P loan providers require at least a fairly good credit history. You will also probably have to pass the lender’s own credit tests as well as being subjected to a traditional credit check through a third party credit referencing agency.
Advantages of P2P Loans
One of the advantages of taking out a P2P loan is that they tend to be more affordable. P2P providers cut out many of the “middleman” activities that are present when taking out loans from banks and traditional lenders and they do not have the same expenses as other types of loan provider. As such, the rates they charge tend to be noticeably lower than you would get from other sources, especially if you are taking out a loan relatively short-term.
You may also have a better chance of successfully obtaining a loan, or of borrowing the full amount you require, from P2P lenders. There are several reasons for this. One is that, if your credit history is imperfect, you may be able to find investors who are willing to take on a small amount of extra risk for higher returns. The fact that the interest rate is also generally lower than when borrowing through a traditional bank somewhat lowers the chances you will struggle to repay, which could potentially help your case. On top of this, P2P lending offers greater flexibility as the funds for your loan could come from multiple people. If nobody is willing to lend you £10,000, there might be four people willing to contribute £2,500.