Peer-to-peer loans are a relatively new way of lending that offer good returns for lenders. Certainly a better return than banks whilst interest rates remain so low. One investor reported that using some of a recent inheritance to invest in peer-to-peer lending saw a return of 4.9% over a year compared to less than 1% using a traditional savings at a bank. So we know they work for lenders but how do borrowers fare?
Short term loans
Short term loans have become more and more attractive to individuals and businesses. Especially in a financial climate where raising money through a bank is nigh on impossible. This is definitely one of the reasons that peer-to-peer lending has become so popular.
MUST READ How Consumers Can Invest Smartly
For the borrower they are relatively simple to arrange. For those looking for short term finance to fund a business start-up or to fund business development, a peer to peer loan may well be the answer.
Short term loans of this type are dependent on clean credit profiles and a definite ‘exit clause’ i.e. a way of repaying the money. They always have a time limit on them and if you are unable to meet repayments or need to extend the loan period, you will pay premium interest rates. Then the only winner is the lender.
Any type of short term bridging loan including peer-to-peer loans are useful for property development in particular or for completing a purchase before a mortgage is in place.
ALSO READ How To Make The Most Out Of Your Investment
Meanwhile investors can put money into peer-to-peer lending schemes and expect a much better return on their money. The whole idea of this type of financing is a type of social lending scheme. The concept is that the middle-man (normally the bank) is cut out making this form of lending seem more personal. In reality there is usually a company or platform that acts as the ‘broker’ in these schemes.
Most of these types of set ups make some provision for bad debts so that their investors don’t lose out if borrowers default.
READ 5 Tips To Diversifying Your Investment
Reasons to take out a peer-to-peer loan
One of the reasons people decide to use this facility to take out a peer-to-peer loan is that it is fast. For small loans you don’t usually need any security. Things that will affect your accept are poor credit rating, age (usually you must be over 18 or sometimes older) and your income. Obviously the lenders want to be as assured as much as possible of repayment.
Short term loans are very useful in the commercial sphere where banks have been reluctant to invest and help businesses to grow. So for those wishing to invest in modern technology, new premises or training programmes there is a positive need for access to additional funding a peer-to-peer loan could be the answer.
AUTHORS BIO: Rob Rudd is particularly interested in the concept of peer to per loans and has himself just become an investor in a scheme. He lives in the south of England with his family.