Peer-to-peer lending is quickly becoming a popular way to secure personal and business loans. However, like any investment opportunity, research is king.
On the back of consumer trust in banks reaching an all-time low, online lending or peer-to-peer lending (P2P) is gaining popularity in Australia. This means that, instead of looking to the big banks for a loan, more and more individuals are choosing an alternative.
Featuring many different loan types, peer-to-peer lending is a platform that can be used to invest or borrow money. When it comes to anything that involves finances, there are inherent pros and cons. However, in the current climate, this type of service may be beneficial.
What is peer-to-peer lending?
Peer-to-peer lending put simply, is when an individual or business applies and sometimes even bids, for a business or personal loan. These loans are typically provided by investors and facilitated by a third party. In some instances, these third parties are online-based platforms or marketplaces.
Those looking to borrow money must first apply through the appropriate platforms. The application process sees potential borrowers vetted in terms of credit and employment history, personal identity, and assets.
Once the platform approves the individual or company as an ideal borrower, loan applicants are then matched with one (or sometimes more) investors who will be able to fund their loan. Cutting out banks altogether.
When it comes to P2P lending, investors must choose how much they wish to invest and in some cases, decide what type of loan their money will be used for. Investors will then review the suitable applications before choosing who they will financially support.
What are the different types of P2P loans?
With several loan types available, it’s important that individuals choose the right loan type in order to meet their repayment needs. When it comes to P2P, there are 4 main loan types:
- Personalized rates: lenders will use the borrower’s personal information to determine interest rates.
- Secured: involves using an asset as security in the event that the borrower defaults. The asset may be cars, property, jewelry, or art.
- Unsecured: stipulates a loan without an asset as security, resulting in higher interest rates.
- Fixed: this type of loan allows individuals to lock in the interest rate for the duration of the loan.
Evaluating P2P lending
For investors and borrowers, there are both pros and cons to this type of loan. With this type of finance, borrowers experience an easy online application process and eventually, lower interest rates. However, there are downsides such as smaller maximum amounts.
When it comes to being an investor, the pros can appear to outweigh the negatives. For example, individuals can personally choose who they will be giving money to, all the while avoiding big lending institutions.
Getting loan approval
Those looking for some financial support can undertake a few key steps in order to increase the likelihood of getting approved for finance. By getting documents in order and being smarter with money before even starting the application process, getting approval can be made easier. Some tips to employ are:
- Check your credit files: Investigating credit files ensures that people can fix any discrepancies and be on the front foot if an investor was to ask about any perceived issues.
- Pay off your debts: If any existing debts are identified during the loan process, lenders will be quick to judge, often increasing interest rates.
- Reduce your credit card limit: If a credit card has a limit of $5,000, lenders will assume that a $5,000 debt exists, even if this isn’t the case.
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How does P2P lending fit into the current climate?
P2P lending proves to be a great opportunity for both investors and those looking to borrow money. In the current climate, many people will also enjoy not having to involve banks in their financial matters.
P2P lending is a very personalized process, however, it is not without faults. That’s why, like any matter that involves finance, each person should do their research and opt for the process that suits their personal, professional, and monetary needs.
