No matter how well you manage your budget, there are some unforeseen circumstances when you need money. In the past, people only had limited options to get loans either they had to go to the banks or traditional lenders, but now new alternative lending options have emerged. Peer to peer lending UK is one of the most popular alternative finance that makes lending and borrowing easy compared to traditional methods. But now, you do not need to go to banks, complete lengthy paperwork, and wait for weeks or months to get the loan. P2p lending eliminates the need for banks or any intermediary and matches borrowers to the lenders directly.
The process of borrowing and lending takes place through online platforms. These platforms act as an intermediary and handle all the things from determining loan eligibility to setting interest rates to transfer funds and getting repayments.p2p lending offers several benefits to investors and borrowers. Investors can make high returns and invest online by logging into their accounts. They can also make tax-efficient income by investing in p2p loans through IFISA.
One most appealing thing about p2p lending for borrowers is that they can get loans at lower interest rates than traditional bank loans. In addition, the application process of p2p loans is quick and takes only a few minutes to complete. Therefore, if you are thinking of taking a loan for debt consolidation, home improvements, or any other purpose, it is worth considering p2p loans. Here in this article, we describe how p2p loans are better than traditional ones.
Shopping For Loans
Shopping for peer to peer loans is much easier as compared to conventional bank loans. In traditional bank loans, you have to complete lengthy paperwork and wait for a long time to get approval. In contrast, a two-step process is shopping for a loan at p2p lenders. The first step is based on your credit rating, and you have to provide some necessary information such as your full name, address, proof of income, the loan amount you require, and how long you want to take out a loan. Depending on this information, your lender will offer a deal that matches your requirements.
If you find a suitable deal and choose a loan according to your requirements, the lender will conduct a strict credit check and may also ask you to verify your income source and provide some additional information. The lending criteria of p2p loans can vary from platform to platform. For example, some platforms require the history of your financial assets, while others also need your educational information. In most cases, you can submit the required documents electronically.
Once you have provided all the necessary information and documents, the p2p platform assesses your information and finalizes the lending decision. This process can take a few hours to days, depending on the loan amount you want to take and the lending criteria of the platform. Most p2p lending platforms use an automatic payment procedure through which you can receive loan amounts into your bank account within a few days after approval.
Impact On Credit Score
When you apply for a p2p loan, lenders conduct a credit check that can impact your credit score. The initial credit check is known as a soft inquiry, and it is similar to the process that you use to check your own credit score. Soft inquiries have no impact on your credit score. However, when you apply for a loan from banks or traditional lenders, they conduct hard credit checks that are reported to the national credit bureaus. As a result, they appear on your credit report and also lower your credit score several points temporarily.
In the second step of p2p loan approval, the loan provider conducts a hard inquiry to check your credit score and also see your full credit report. This process typically lowers your credit score a few points, and if your loan application is approved, your credit score drops a bit more. As a result, your credit score goes down whenever you take a loan, making it harder to take new loans. However, your credit score will bounce back if you repay the loan amount on time.
Cost Of Borrowing
The annual percentage that peer to peer lending platforms span a wide range. It can be as low as 5.49% or as high as 35.89%. The interest rate you get highly depends on your credit score. The higher your credit score, the less interest you have to pay and vice versa. P2p platforms also charge several fees, such as origination fees and administration fees, which add up to borrowing costs and can make it expensive. The amount of fee depends on the loan size and crest history of the borrowers. However, p2p platforms operate online, and there are fewer overhead charges compared to traditional bank loans. Furthermore, no p2p lending platform charges a fee for early repayment, but you have to pay penalties on late repayments.
Before Applying For P2p Loans
If you have decided to take a p2p loan instead of a bank loan, there are some essential things that you should keep in mind.
- Always take a look at the fine print given below every p2p website to get an overview of their interest rates, loan size, and fees they are charging.
- Review your credit score to find out any negative entries and take steps to improve your credit score.
- Determine the amount you want to borrow. If you qualify for a larger amount, p2p platforms will encourage you to take out a large amount. But you should keep in mind that if you take out extra cash, you have to pay extra interest. Thus, it is always better to take a loan amount that you need to fulfill your requirements.
- Always do research and make price comparisons before choosing a platform. You can use an online comparison site to find a platform that offers competitive rates and follow the best lending practices.
Although peer to peer lending offers several benefits to the borrowers, there are some circumstances where you need loans that you can only get from the banks or traditional lenders. It means that whether a p2p loan or traditional bank loan is suitable for you depends on your personal circumstances. However, with p2p loans, you can enjoy the benefits of low-interest rates, online application and quick approval, and access to fun.