Peer to peer lending

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 put in touch 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 lenders’ websites put you in touch with people who will lend it to you. As such, the companies behind these services act as intermediaries between a borrower and a lender or 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 score.

If you apply for a loan, you will be credit checked using a credit reference agency and also have to pass the peer to peer company’s own credit tests.

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 mainstream lenders) which may suit you if you only want to borrow a small amount.
  • They are another option if you have difficulty getting a loan from a bank or building society.
  • Most lending sites allow you to repay the loan early without a penalty.

Cons of peer to peer lending

  • Interest rates of peer to peer loans may be higher than high street banks or building societies, depending on your credit rating.
  • You usually have to pay a fee to the peer to peer company for arranging the loan, in some cases, even if the loan is not fully funded. This can mean multiple fees if you have to apply more than once.
  • You might still find yourself unable to secure a loan if you have a poor credit score or have managed your finances poorly in the past.

Peer to peer companies

Peer to peer lenders that allow individuals to borrow money include:

Peer to peer lenders that allow businesses to secure business loans and individuals to lend money include:

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 may be able to borrow at an interest rate of around 7% but in some cases the rate may 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 lenders also generally charge a fee to arrange the loans.

How peer to peer loans compare to the banks

The table below shows the total cost of a personal loan of £5,000 over three years for a person with a good credit score from both peer to peer lenders and banks.

Lender Representative APR Monthly repayment amount Fee Total cost of loan
Zopa 7.5% £155.06 £100 £5,682.16
Clydesdale Bank 7.8% £155.72 £0 £5,605.92
Santander 8.6% £157.33 £0 £5,663.88
RateSetter 9.4% £158.98 £115 £5,838.28

Source: Moneyfacts, May 2012 (borrowing fees added to the loan).

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 you may be offered less than you want to borrow or you may be offered a certain amount at one interest rate and different rates of interest by other peer lenders.

Rules and regulations

Peer to peer lenders classified as loan-based crowdfunding are regulated by the Financial Conduct Authority. 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 to get involved.

The Financial Ombudsman Service 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.

Read more on the Financial Ombudsman Service website

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

  • If you default on a peer to peer loan, the company may 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 may 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 any other loan.

Alternatives to peer to peer loans

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