Peer-to-peer lending (P2P) is a great way to acquire loans directly from individuals, eliminating banks and other financial institutions. P2P is getting quite popular among people as it’s a hassle-free loan approach compared to financial institutions like banks and involves less documentation. 

A peer to peer lending or P2P platform is typically a managed fund under ASIC’s approved managed investment scheme. Each fund requires by law to be registered with ASIC. The fund requires to produce a product disclosure statement( PDS). This sets out features, benefits, costs, risks of the fund.

Peer To Peer Lending 2

To know more, it is important to know how P2P operates in the financial domain. Certain individuals (known as Lenders) lend money to businesses and individuals based on the lending mechanism with interest on agreed terms. The money will return to the lender once the loan is repaid. 

In peer-to-peer lending, one of the great advantages is that little risk is involved with promised high return, which the lender enjoys for the end of the agreed repayment time.

Another advantage of this finance is that it suits borrowers who typically struggle to qualify for the complex loan criteria set by typical financial institutions and banks. Compared to the said entities, P2P lenders provide several relaxing requirements to borrowers, making it easy for them to qualify for the loan.

How Does Peer-To-Peer Lending Work?

The process of peer-to-peer lending involves the supply and demand of the financial market. P2P allows small-to-medium-sized businesses and individuals to finance their business through a hassle-free loan procedure. By fulfilling their financial needs, P2P also ends the worry of borrowers who are in a financial crisis. 

Clients with time-sensitive requirements don’t need to wait for long approvals from financial institutions and banks. Once you are eligible for the loan, you will instantly receive the loan on agreed terms and conditions.

Peer to Peer Lending 1

The mechanism of lending funds is generally divided among the pool of borrowers. Once you plan to lend with some financial institution, it’s in your hand where you want to lend funds with the liberty of choice. It’s a relief to a lender who only wants to lend to safe and emerging businesses and individuals with great financial credit history and reputation. 

Compared to traditional banks, P2P lending is higher than the usual interest rate. Generally, as per financial experts, the higher the interest rate, the greater the chances of default and delinquency will be and it will end up in non-repayment.

P2P (or marketplace) lending lets someone needing a personal or business loan to borrow money from an investor as an alternative to using a bank, credit union or building society. The debtor takes out a loan – and repays it over time with interest. When you participate via P2P lending, you buy a financial product. This is typically a managed fund.

How to start lending with P2P lending?

If you have some funds and want to earn good returns using peer-to-peer lending, then first do some research and learn about P2P. Check out the lenders, and make a strong comparison before shortlisting the one that best fits the equation.

Essential steps 

  • Register with a P2P lender by opening an account. Once the account is opened, then transfer funds via Direct transfer and debit card.
  • Once the payment is transferred, then set the desired interest rate you like to receive on the lending amount available in the drop-down. Once you agree on the rates on the given offer, the second step is completed.
  • Lastly, you must lend the fund for a specific period with complete details. Traditionally, this period is 3 to 5 years long. Also, know that a fee of 1% is applied as a lending money fee; it’s always 1% of the loan amount per market dynamics.

Various websites offer a feature like an auto bid

There are hundreds of websites online that provide full control in your hand. The amount required of funds you want to lend, interest rate – you can fluctuate the value for your and borrower’s interest. To attract the borrowers, you can set the limit to the lowest possible interest rate.

Comparison of Peer-to-Peer Loan Lenders

When comparing loan offers from peer-to-peer lenders or any personal loan lender, there are several factors to consider.

  • Annual percentage rate (APR):  The APR is generally the overall cost paid to borrow the fund. It is calculated with interest rates and processing fees. For a higher interest rate, you will end up paying more than lending. The average APR for any loan for two years (24 months) is around 9.51% in the first quarter of 2022. Most rates are determined based on credit score and debt burden ratio (DBR) income.
  • Loan Tenure or Terms: Loan tenure is the time frame you agreed to repay the lent amount. For a personal loan,  terms are normally between 3 to 5 years. However, if you opt for a shorter term, then it may come with a higher monthly payment schedule. The primary perk of it is that you will get a lower interest rate with overall rest repayment. 
  • Financial Institution Fees: Few lenders charge financial institution fees to borrowers- – but not in every case. The varying fee is calculated on the loan amount. For instance, if the loan amount is $2,000, an 8% $160 financial institution fee would be charged and added to the loan. 
  • Early settlement penalties: Few lenders charge early settlement penalties. Suppose you plan to make an early loan payment to finish it quickly. As stated in the loan agreement, you must pay a certain fee. Whereas its essential to read the agreement in detail to ensure no unwanted or hidden fee is paid in the early prepayment scenario.
  • Least qualifying Credit Score: Least minimum credit score is the score required to qualify for a loan from any lender. The P2P lenders only offer fair-to-excellent slabs. The least credit score for customers should be 580 or more. If the borrower has a 580 credit score, then start the loan proceedings.
  • Pledge and collateral: It depends on the credit score. However, few lenders provide secured loans against pledged car, home, and business documents. These are used as collateral for the loan. If you have pledged something, chances are that huge or big loans will get approved by securing a great Interest rate (IR). 
  • Disbursement of Loan:  Disbursement of a loan depends on the lender. Once the loan application is approved, the lenders disburse the loan within 24 hours. However, that may not be the case with every lender. Some lenders take several days even after the approval of an application to disburse the loan. If you are in a rush, always ensure to select a lender who is well-reputed in disbursement.

Easy step on how to apply for Peer-to-Peer Loan

Let us explain the easy way to check eligibility. Most P2P lenders now provide pre-qualification calculators and tools to check loan eligibility in some cases. They offer sample rates and repayment terms in those software and tools. The best part is that it is done without impacting the credit score. If you decide to move ahead with documentation and application type, it can be filled out online without any hassle.

Guide on P2P lending and tax 

It should always be considered that whatever income you generate from P2P lending falls in the income category and is taxable.

Other Considerations For Peer-To-Peer Lending?

Peer to Peer lender operates an online platform as other fintech lenders do. The platform acts as an intermediary between investor and borrower. It makes money by charging both investor and borrower. As an investor, the lending may offer you an attractive interest rate. The rate and how the platform operator calculates can vary. 

Who Is Suited For Peer-To-Peer Lending?

To decide if investing in P2P lending is for you, consider the following: 

  • The interest rate is relatively high on the rate of return, compared to some other types of investing.
  • Ease of Funding: an online platform can make transacting easy and accessible. 

As a lender, you are not insured that your investment is safe and sound. The platform operator assesses the lending risks and repayment capacity of the debtor. 

Lending risk: many P2P loans are unsecured. The platform operator may not disclose the lending risk of each borrower. This risk is pure lies on you. You can lose some or all your money, even if the risk is low. 

No Protection: There is no government protection or any government guarantee on funds. For example, if your investment was lost to the fraud of the operator, you may not have an option for compensation. 

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