Money Advice Service

Over the last few years a new area 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 up with those who will lend it. Here’s how it works and how it compares to borrowing from banks and building societies.

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, the peer to peer websites match you up with people willing to lend it to you.

As such, the companies behind these services (called ‘platforms’) act as intermediaries between borrowers and lenders.

They can offer lower interest rates than traditional loans. 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 available only if you have an excellent credit history and no previous problems.

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.

For more information on Peer to Peer lending, read our guide: Peer to Peer lending: what you need to know

Pros of peer to peer lending

  • If you want to borrow some money, peer to peer loans can be cheaper than banks or building societies, especially if you have a very good credit rating.
  • Some peer to peer websites have no minimum loan amount (in contrast to most banks and other mainstream lenders) which might suit you if you only want to borrow a small amount for a short period.
  • They are another option if you have difficulty getting a loan from a bank or building society, depending upon your credit rating

Cons of peer to peer lending

  • Interest rates of peer to peer loans might be higher than high street banks or building societies, depending on your credit rating.
  • You might have to pay a fee to the platform for arranging the loan, even if it is not fully funded. This can mean multiple fees if you have to apply more than once.
  • 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.
  • You might not have the same protections using a peer to peer platform as if you borrowed in other ways. This varies according to how the loans are drawn up and who the lenders are – for example, whether they are institutional investors or private individuals. Ask the platform how this works and how it differs from a normal loan.

How much do peer to peer loans cost?

The interest rates on the loans vary significantly depending on how much of a risk you’re seen as.

  • 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, so you need to check.
  • If you have a poor credit history, your interest rate could be as high as 30% (or more likely you will be rejected).

Peer to peer platforms also generally charge a fee to arrange the loans.

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 over what term.

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’ the loans between lots of different people.

Depending on your credit rating and the individual platform, you might be offered less than you want to borrow or you might be offered a certain amount at one interest rate and different rates of interest by other lenders.

Rules and regulations

Peer to peer platforms and some individual lenders, are regulated by the Financial Conduct Authority (FCA).

That means that if you’re unhappy and make a complaint, the business has eight weeks to sort it out.

If, after eight weeks, you’re still not happy, you can ask the Financial Ombudsman Service (FOS) to get involved.

The FOS has official powers to sort out complaints between you and a financial business you’re unhappy with.

If they agree that the business has done something wrong, they can order them to put things right. The service is free to use.

The peer2peer Finance Association (P2PFA) is the UK industry body for peer to peer finance and was set up to ensure high standards in this fast growing industry.

All members must adhere to the rules and operating principles drawn up by the association.

Check if a platform is a member of the P2PFA

Things to be aware of when applying for a peer to peer loan

Before choosing to apply for a peer to peer loan, be sure to consider:

  • If you default on a peer to peer loan, the company might pass the loan on to a debt collection agency which will chase it on behalf of the lender or lenders. As a last resort, it 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 loans.

Alternatives to peer to peer loans

If you’re looking to borrow money, there are a number of other borrowing options worth considering.

This article is provided by the Money Advice Service.