What is a peer to peer loan?

Peer-to-peer loans, also referred to as P2P, are a type of short-term unsecured loan and is a way of lending that has been increasing in popularity over recent years. The concept is financial matchmaking. Individual people who want to borrow money are matched up with individual people who will lend it to them. This form of lending bypasses the usual financial institutions such as banks or building societies.

Peer to peer lending happens via ‘platforms’ which is essentially the technology system/ website that matches up potential borrowers looking for a loan with potential lenders who will give it to them.

Although the loan amount will be coming from lending individuals ‘peers’, the platform will act as a go-between so you won’t be dealing directly with any other people yourself.  All of your loan repayments are made to the platform.

Because peer to peer platforms have much less overheads than traditional banks, the lenders and borrowers can both access better interest rates.

They are an alternative and often attractive option to consider whether you have difficulty getting a loan from a bank or building society or not. 

How peer to peer loans work

To apply for a loan, simply go to one of the P2P lending sites such as Zopa and register, select the amount you want to borrow and the length of the repayment term.

Most platforms will ask you to complete a quote enquiry form and provide some ID so that they can perform a credit check to view your credit history.

Following the check, you’ll be quoted a breakdown of your potential loan. If you are happy with the details such as APR, amount payable and duration then you can proceed to a full application.

An underwriter will get involved and make the final decision on whether your loan application is accepted. Other credit checks may be conducted at this point. If you’re approved, you’ll then be offered a loan and matched with a lender (or multiple lenders) who is willing to provide funds that match your quoted criteria. You can choose to accept or decline the offer.

Peer to Peer Loan Summary

  • 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.
  • Peer to peer platforms typically charge a fee to arrange the loans.

P2P interest rates

Peer to peer loans can offer lower interest rates than traditional loans because of lower overheads than traditional financial institutions. Whether or not this is the case for you will depend on certain factors such as your credit rating.

Some of the best rates are available if you have an excellent credit history and no previous issues.

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.


How to get a peer to peer loan

Each peer-to-peer platform will have their own rules about who can apply for a loan. Most will set a minimum age, normally 18 or 21, and they’ll ask that you show proof of a minimum amount of income, and that you’ve been a UK resident for a number of years.

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.

Are peer to peer loans a good idea?

Like any personal loan, you will need to decide for yourself what commitment you can make to repay your borrowing.

  • 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.

Are peer to peer loans safe? 

Yes, because peer to peer platforms 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. After eight weeks, if you are 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.


Peer to peer loans with bad credit

You may be wondering if you can get a peer-to-peer loan with bad credit. The answer is maybe. There is flexibility in the types of loans and rates from peer to peer platforms.

The interest rate you pay is likely to be directly proportional to your credit rating. The lower your score, the higher the interest you’ll pay

People who have lower credit scores can potentially borrow at higher interest rates from individuals who are looking for a bigger return and willing to accept more risk.

If you have bad credit history, check out our Bad Credit Loans page. You should also look to improve your credit rating whenever possible.


Peer to peer business loans

Peer to peer business lending is a relatively new source of business finance that is growing in popularity in the UK. Businesses looking for funding are matched with lenders via online platforms in the same way as personal P2P loans, or through brokers.

Businesses are typically asked to complete an online form and answer a set of standard questions about how the loan will be used, the amount required and how long you need it for, along with your company information.

After that P2P business loans works just like any other loan and you make fixed repayments for the duration of the loan term. Find out more about Business Loans on our business loans pages.


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