How does Peer to Peer Lending Work?

Unless you have been actively seeking a loan or financial help in the past few years, you may not have come across the term ‘peer to peer lending.’ However, after receiving quite a few years of global success, peer to peer funding has took the financial market by storm.

Peer to peer lending platforms hit the financial market about a decade ago – but there are still many Brits who have never heard of it or don’t understand how this type of borrowing works. Alternative finance solutions such as crowdfunding and peer to peer lending can help businesses access cash which wouldn’t be available to them from a bank, and is also a way for investors to get a healthy return. Peer to peer lending schemes can also be used for personal borrowing, to fund debt consolidation or home improvements for example.

Because this is so far away from traditional lending, it can be difficult to understand. Genie Lending’s peer to peer specialists explain below everything you need to know about peer to peer lending.

There was once a time when banks were the only option for businesses, property investors and individuals – but now there is a safe and fast way to secure funding for any project.

What is Peer to Peer Lending (P2P)?

If you take out a loan from a bank, you are lending money from that financial institution. If you us apeer to peer scheme, you are lending money from people instead. That is the vital difference between peer to peer lending and traditional bank lending. The people involved in the transaction are unknown, and borrowers have to go through peer to peer lending companies such as Genie Lending.

Why is it Popular?

As banks in the past years have been cracking down on lending, many businesses simply don’t bother applying for loans anymore. Now there have a legitimate alternative in peer to peer funding, which actually offers many more benefits than a bank loan. Both lenders and borrowers stand to benefit from peer to peer lending, which is why it is an attractive solution for the market itself.

Here are some of the main advantages of peer to peer funding:

• You are much more likely to get accepted for credit
• You don’t have to go through a bank and deal with a difficult application
• Much faster access to the cash than with a bank application and approve process
• It offers more competitive rates, due to less infrastructure and administration
• It is protected by government legislation since 2014

Growth of P2P Lending

The peer to peer lending sector has recorded huge growth over the past five years – and with Brexit putting even more uncertainty on the economy and the high street banks, it looks set to continue growing. P2P is becoming a mainstream funding solution, with the market providing over £5bn in loans in the second quarter of 2016 alone, according to data from the peer to peer finance association. With so many individuals and businesses benefiting from this fresh way of lending, there is no need to despair at your declined bank loan letter.

Who am I borrowing off?

The main distinction between this type of lending from others, is that you’re borrowing money off money rather than a financial institution. A group of small investors will lend you the money instead of the bank, and you’ll still have to pay an interest rate when repaying it. Typically borrowers will pay less interest than a traditional bank loan, and lenders get more interest than they would if they had cash sat in a savings account. This is why peer to peer lending has been so successful – it has advantages for both sides.

To access peer to peer lending, you will need to contact a specialist broker or join up to online funding websites. These will help match borrowers with lenders and arrange a peer to peer loan on your behalf.

What is the difference between peer to peer lending and a bank loan?

First of all, it is much easier to access finance through peer to peer lending than get approved for a traditional high street bank loan. Secondly, you should understand that you are lending off individuals rather than a financial institution, and because of this fact you are likely to pay less interest on the loan.

Is it safe?

From a borrower’s point of view, it is just as safe lending from peer to peer platforms as it is from a bank. The risk is on the side of the investors, as they can’t be certain you will make all the repayments. However, the peer to peer lending industry has gone from strength to strength. One of the biggest players, Funding Circle, lends £65.4 million a month around the world. The sector has also been regulated by the Financial Conduct Authority since 2014 to ensure best practices by alternative finance providers.

Find out more about peer to peer lending on our website or by calling us for advice.