What are peer to peer loans and how do they work?
Peer to peer lenders
Peer to peer lending is basically people lending money to other people who are not friends or family. This type of lending does not go through any traditional financial institution, such as a bank, but instead uses an intermediary company such as Zopa or RateSetter that vets applicants and decides whether they are a low enough risk lending to. The majority of peer to peer lending is done as unsecured loans and the interest rates as set by the lenders in relation to the individual. Higher risk lenders attract higher interest rates, and lower risk lenders attract lower interest rates.
What’s in it for the intermediaries?
The intermediary companies that actually administer the loans are for-profit organisations who generate their revenue from the fee that is charged in order to take out the loan. They also make money from the investors in the form of a fund management fee, which is either a fixed amount or percentage of the loan amount. Operating completely online, there are also few overheads, especially as many of the processes are automated, so running the company is cheaper than for mainstream lenders.
Related: Peer to Peer Business Loans
Who can apply for a peer to peer loan?
There are really only three things that you need in order to qualify for a peer to peer loan. Firstly you will need to be able to confirm your identity, usually through a passport or driving licence, you will need evidence of your income and ability to make the repayments, in the form of pay slips and bank statements, or the equivalent of these if you have slightly different circumstances, and finally you will need a good credit history and ben able to demonstrate a good track record of repaying your debts.
What interest rates will i pay?
This will depend on a number of factors, but it will mostly be related to the amount that you borrow. If you borrow a small amount, or a large amount you will find that you will pay higher interest rates of around 8%. If you have a loan of around £5000 to £20,000 you will find that you pay between 4% and 5% depending on the term that you choose to repay the loan over. It is also worth noting that you don’t generally have early repayment fees.