Peer-to-Peer (P2P) lending has become a popular way of obtaining finance in Australia. P2P lending doesn’t use the traditional form of borrowing from banks but instead allows individuals or companies to borrow directly from investors.
P2P lenders use a secure online platform to match potential borrowers with investors. This form of lending cuts out the “middle man” (banks and traditional lenders), has low operating costs and can offer lower interest rates. Borrowers and investors details remain confidential and matching is usually determined by the lending platform and by following the desired preferences of the investor.
Peer-to-Peer Loans and Borrowers:
P2P loans are used for personal use like debt consolidation, a holiday or purchasing a car. However, it is possible to get a P2P business loan as well. The interest rates are usually lower than the rates offered by traditional bank lenders. Borrowers get interest rates based on their personal circumstances, credit rating and risk factor. Being primarily an online process, there is usually a quick application and gives the borrower the ability to apply anywhere and anytime.
Benefits for Borrowers:
- Lower interest rates
- Quick and simple online application process
Disadvantages for Borrowers:
- P2P loan amounts can be lower than the loan amounts offered by traditional lenders
- There may be an upfront application fee
Related Article: Things to Consider Before Getting a Personal Loan
Peer-to-Peer Loans and Investors:
Usually, P2P lending platforms are set up as managed investment schemes. Investors decide on how much they want to invest and tend to receive high returns on their investment. This makes it an attractive option for someone looking for a new investment opportunity. However, all the lending risk is taken by investors, which means there is a possibility of losing money if the borrower doesn’t repay the loan.
Benefits for Investors:
- Receive high returns on investment
- Investors can set preferences with who they invest in and how many loans they can invest in
Disadvantages for Investors:
- Investors may have to wait to be matched with a loan, which means there may be no return on investment straight away.
- Investors take on the risk if borrowers default
P2P lending can work out to be a good investment for investors and a good option for a loan as a borrower. But before choosing to invest or borrow from a P2P lender always do your research to make sure you understand the specifics of the loan and how the process works.
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