Peer to peer lending is a web-based alternative to conventional financial resources such as banks or credit unions. It makes borrowing and lending quick and easy and offers numerous benefits to borrowers and investors. For certain loan types, it has become a more affordable option for borrowers. It is also a money-making opportunity for those who have money to invest in loans. If you are thinking of investing in p2p loans or want to take out a loan, you may have several questions in mind. That is why it is vital for you to understand p2p lending before investing or borrowing through it. Here we combined all the necessary information about Peer To Peer Lending in this guide to help you in deciding whether you should use this alternative finance or not.
How Does P2p Lending Work?
You can invest in or take out p2p loans through online peer to peer platforms. These platforms act as an intermediary and match potential borrowers to the individuals willing to invest in loans. In simple words, we can say that these platforms bring borrowers and investors together, but investors and borrowers never need to deal with each other directly. P2p platforms do all the hard work and handle all the processes from screening borrowers to setting interest rates and transferring funds to collecting payments. There are several p2p platforms in the UK. All these platforms provide an opportunity for individuals to become a borrower or apply for a loan.
Some platforms only apply for personal loans, while others also provide business and property loans. P2p loans are equally beneficial for investors and borrowers. Investors can earn high-interest rates and diversify their investment portfolios to spread risks. Moreover, many platforms allow you to open an IFISA account through which you can invest in loans and earn returns within a tax-free wrapper. On the other hand, borrowers can enjoy the benefits of online application, fast approval, and quick access to funds.
How P2p Lending Differs From Traditional Lending?
The most significant thing that attracts borrowers is that they can get a loan at lower rates than traditional bank loans. The application process for p2p loans is quick and easy and takes a few minutes to complete. It helps borrowers a lot and makes it easy for them to shop around and find loans at the best possible rates.
The shopping process of p2p loans is also gentle on your credit score compared to conventional bank loans. Because the initial approval process of peer-to-peer loans that create offers including loan amount and interest rate uses soft inquiry to check borrower’s credit history. This inquiry is similar to that which you use to check your credit score, and it does not affect your credit score. In contrast, when you apply for a traditional loan, a hard inquiry is carried out, which lowers your credit score several points.
Be mindful that when you accept a p2p loan offer, the platform is likely to make a hard inquiry before the final approval that can cause a reduction in your credit rate. However, up to this point, you can compare different p2p lenders without affecting your credit score. It is something not possible with traditional loans.
