A Dummy’s Guide On Peer to Peer Lending
Firstly, What Does It Mean?
In essence, peer-to-peer lending (sometimes referred to as social or crowd lending) allows you to impart your own money directly to others looking to borrow, be it for personal or business use. It’s a relatively fresh and innovative sector of the financial industry, so care must be taken every step of the way.
As standard high street bank offerings such as cash ISAs and everyday savings accounts struggle with inflation, a peer-to-peer loan is a viable alternative option for any willing lender, which will provide a better rate for the borrower and more importantly a better return on investment for the lender.
The Pros are that rates for both lenders and borrowers can be substantially better than if you went to your bank, as doing it yourself eliminates the need for dealing with banks directly and offers you more control of your money
Although a fabulous idea, the cons of peer-to-peer lending are that it brings a much greater risk than going through your bank, as they offer lower protection for both parties and are not covered by the Financial Services Compensation Scheme (FSCS), meaning if a company/website goes under, you will almost certainly struggle to get your money back.
So, it may look like saving, but it’s more akin to an investment than anything else, which as professionals know, comes with a certain degree of risk.
Where Can I Find A Decent Peer-To-Peer Scheme?
If dating websites match people up based on their personalities, these financial websites match lenders seeking a decent return and borrowers after a bargain rate. There are many websites out there that offer excellent rates and deals, the key is finding the right one for you.
Free from extortionate overheads and the ‘middleman’ status that naturally occurs with large businesses and banking organisations, peer-to-peer websites can provide much more convenient rates, which are highly pleasing to one’s wallet.
Many commercial finance specialists will be able to offer a quick and easy online submission form so you can immediately check whether you are eligible for borrowing using a peer-to-peer loan. Remember, if you plan to borrow you’ll be subject to various checks via a credit reference agency (CRA), plus any additional checks deemed important enough by the peer-to-peer site in question.
Things To Look Out For As A Lender
There will most likely be some annual fees to pay, whether it’s on your earned interest or a token percentage of your total investment. You’ll also need to pay tax on what income you make, and of course, bear in mind that as you’ll be connected directly with the borrower, you may not receive your money back if they fail to repay you. However, the peer-to-peer website you’re using should take care of the awkward chasing of repayments for you.
With no official regulatory bodies in place at the current time (planned for April 2014 by the Financial Conduct Authority), this is an incredibly risky move.
Wendy Lin lives in the countryside of Reading, England as a free-lance writer and entrepreneur. She enjoys her quiet life with her family and dogs.