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What is Peer-to-Peer Lending?

If you’ve been researching alternative loan options, you may have encountered the term peer-to-peer lending. This method bypasses the need for a financial institution to provide you with a loan – instead, you’re borrowing directly from an individual who sets your loan terms and interest rates. It may sound like an appealing way to bypass overhead costs and secure a lower interest rate and more favourable terms, but peer-to-peer lending also comes with significant risks. 

All about peer-to-peer lending

Peer-to-peer (P2P) lending is an alternative type of personal loan available in Australia. P2P lending involves borrowing money from private individuals and investors, while traditional loans are available through financial institutions. 

Also known as social lending or crowd lending, P2P loans have only been around since the mid-2000s. However, they have experienced a boost in popularity in recent years as it’s become easier to access peer-to-peer loan providers online. P2P lenders have a reputation for offering more affordable loan terms than traditional lenders. They don’t have to worry about the overhead costs many financial institutions may face, which can be passed on to customers. 

To qualify for a peer-to-peer loan, you need to meet the same eligibility criteria for any loan. You must be able to submit documents proving you are an Australian citizen or permanent resident, you are 18 years of age or older, you are currently employed, and you do not have a history of financial hardship. 

How does peer-to-peer lending work?

If you’ve decided to seek peer-to-peer lending, there are a number of online platforms that connect you with prospective investors. In general, the peer-to-peer lending process will follow these steps: 

  1. Application: you’ll complete the application online, which includes information on the purpose of the loan, the amount you’d like to borrow and your preferred loan term. You’ll also need to submit any documentation that proves you meet the P2P loan eligibility criteria (ID, bank statements).
  2. Assessment: the online platform will review your application and assign you a risk rating. This risk rating is generally based on your creditworthiness, any security you offer against the loan and revenue projections. Based on this risk profile, the platform will also assign an interest rate. 
  3. Loan Listing: once the assessment is completed, your loan request is listed on the P2P lending platform. Investors can see the details of your request. They will then decide to fund the loan in part or in full.
  4. Loan Acceptance: you may end up with several different investors for your loan – you can also accept more than one investor if no one has offered to fund your loan in full. However, if you don’t receive enough offers to fully fund your loan after a specific period, your loan request will be removed from the platform. This period will depend on the individual loan platform. 

Peer-to-peer lending can generally be applied to anything for which you secure a personal loan. Home renovations, funding a holiday, paying medical bills, and purchasing a car all fall under the reasons to apply for a peer-to-peer loan.

What are the disadvantages of peer-to-peer lending?

On the surface, peer-to-peer lending can seem like an attractive option. It’s essential to consider a couple of crucial factors before proceeding with this type of loan.

  • Loan amount limitations: while all financial institutions have limits on the amount of money you can borrow depending on the type of loan you request, P2P loans generally have a smaller amount that they can offer. You run the risk of being unable to request the amount you need. 
  • Shorter loan terms: most financial institutions will offer loan terms of between one and seven years, depending on the type of loan and your financial circumstances. There are usually risks here, too, for peer-to-peer loans, which can offer lower loan terms than other lenders, putting more financial pressure on you. 
  • Partial funding: if your loan request is only partially funded by the pool of investors, you may walk away with nothing, as loans must be fully funded (by one or several investors) to be accepted. 
  • Limited protections: your financial institution is here to help if you’re struggling to repay your loan by adjusting repayment frequency or reviewing the loan terms with you. None of these protections are available when you secure a peer-to-peer loan. This also extends to customer services when you have questions about your loan or repayments. 
  • Credit rating risk: investors for peer-to-peer loans may not be willing to take a risk on someone with an average credit rating. 

Is peer-to-peer lending the right choice for me?

Whether peer-to-peer lending is the right choice depends on your financial situation. It is always best to seek advice from a trusted source before making significant financial decisions, making sure you’ve thoroughly researched the advantages and disadvantages.

Explore fast and flexible financing options from Handy Finance

If peer-to-peer lending is not the right loan method for you, Handy Finance is here to help. We offer a selection of personal loans that cover a wide range of big life expenses, all with loan terms tailored directly to your financial situation. Whether you need a loan for debt consolidation, for a new car or boat, to fund your dream holiday or wedding, or to finance home renovations or green upgrades, our credit experts are here to help you find the right product. Apply online and receive an indicative decision within minutes. Contact the Handy Finance team today to get started.