Your peer-to-peer lending guide

Jane Gibbons By Jane Gibbons, 20th Mar 2015 | Follow this author | RSS Feed | Short URL
Posted in Wikinut>Money>Loans

A summary of everything you need to know about this alternative loan option.


Welcome to your peer-to-peer lending guide, here we’ll outline how the system works, how it’s regulated and what problems you could run into. We’ll also cover a few of the common peer-to-peer lending types and brands you will encounter if this is a loan option you’re considering.

So, what is it exactly?

Peer-to-peer lending (P2PL), also known as crowd-lending is borrowing that cuts out the banking middle-man, the removal of an extra pair of hands leads to lower interest rates for borrowers. Traditional loan companies run a fairly aggressive maximum profit business model, with some businesses earning several million every year, this element is largely removed in favour of a more sustainable (and competitive) lending rate.

How does it work?

Peer-to-peer customers are chosen by lenders according to credit checks so they can be rated before deciding if the borrower is likely to pay back. One of the distinctive differences between this model and traditional loans is of course the ‘peer’ element. This basically means that users have the option to offer your own money to be lent, where to you it will appear like you’re putting it in a savings account. While Peer-to-peer offers better rates than banks, but there’s significantly more risk as they don’t have a compensation scheme like all government-backed financial services.

What types are there?

Peer-to-peer lending firms can be broadly categorised into two genres, the first, like Zopa, are long running, well established websites that were the first to pioneer the standard peer-to-peer lending model. Zopa has been in the peer-to-peer lending business for as long as anyone, having lent £771 million since 2005. It’s also been frequently voted the best and most trusted loan provider by its customers.

The second genre is a newer breed - peer-to-peer lending combined with asset finance. This new hybrid loan model came on the scene when Unbolted launched its website last Christmas, becoming one of the fastest growing fintech companies since then. By using this peer-to-peer system coupled with asset-based lending (think of it as an online pawn shop in essence) comparably lower interest rates are produced compared with traditional competitors and even the ‘standard’ peer-to-peer model. Acting as this online pawnbroker, sending an item of value to acts as collateral, meaning any problems with repayment lead to that asset being sold and any excess returned to you - which reduces the risk involved, and subsequently your interest rate.

Understanding the risk

It’s important to know the risks associated with peer-to-peer lending, as it’s definitely not for everybody. Each business will operate in its own way, with different ways of lending, applying, repaying or credit checking. Before you apply make sure you’ve considered all options and found the lender who aims and lending system seem best for you. Individuals and businesses that use peer-to-peer websites are more protected than they previously were after the industry became regulated by the FCA (Financial Conduct Authority) on April 1st 2014. The new rules stated that businesses have to present information clearly, be straight-up about the risks and have plans in place for if something goes wrong for a customer. Large fines are the punishment for the lenders if they break any of the rules. It was also said in the 2014 rule changes that by April 2017 all lenders must have at least £50,000 in the bank, which will act as a buffer to help them withstand financial uncertainty. If a lending business you’re using does go bust, it is unlikely that the system for payments or repayments will run smoothly for the customer.

In many ways P2PL is an innovative and almost revolutionary system, but don’t make the mistake of thinking you have found a fool-proof system and that your money will always be secure in the hands of lenders. Peer-to-peer is a high reward system compared to the traditional high street banks, but as the reward goes up so does the risk.


Loan Guide, Peer-To-Peer Lending

Meet the author

author avatar Jane Gibbons
Digital marketing executive, I like to write in the financial technology niche, I also run my own personal finance blog.

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author avatar Melissa Dawn
21st Mar 2015 (#)

Great article and great info. I had heard of zopa but not the other one. Thanks for sharing!

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author avatar Jane Gibbons
21st Mar 2015 (#)

Glad you liked it Melissa!

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