Peer-to-peer (P2P) lending has emerged as a popular alternative to traditional bank loans in recent years. It is an innovative financial service that connects individual borrowers with private investors, bypassing the need for intermediaries such as banks and credit institutions.
Let’s start off by looking at the positives of investing in the peer to peer space.
1. Accessibility
P2P lending platforms make borrowing and lending money more accessible to a wider range of people. Borrowers who may have been rejected by traditional banks due to their credit history or lack of collateral can now access funds through P2P lending platforms. The profile of these borrowers could range from international students in the UK who have relocated to study, or new families who have recently migrated. For investors, these platforms provide an opportunity to diversify their portfolios and potentially earn higher returns than traditional investment options.
It is a good service for borrowers seeking a source of funding for unique projects or personal finance.
2. Lower fees
P2P lending platforms generally offer lower fees compared to traditional banks. As a result, borrowers can save on interest payments, while lenders can still enjoy attractive returns. Our borrowing customers also benefit from the competitive rates that we offer, especially through the launch of our new longer-term rate for risk product.
3. Faster approval process
P2P lending platforms leverage advanced algorithms and data analytics to assess the creditworthiness of borrowers. This results in a faster, more efficient approval process compared to traditional banks, which often involve lengthy paperwork. At The Money Platform, we currently do a traditional credit check with Equifax and Transunion. The Money Platform usually approves applications within minutes but this can take up to 24 hours on occasion.
4. Adjustable loans
P2P lending platforms provide borrowers with greater flexibility in choosing their loan terms, such as the repayment period and interest rates. At TMP, borrowers have the choice to pay between one to three months and select loan amounts between £250 – £1000 if eligible.This customisation allows borrowers to tailor the loan to their specific financial needs and circumstances.
5. Alternative form of investment
Returns on invested funds are appealing as there was a net return of 7.3-8% for lenders who invested with TMP in 2022/2023. You can start your journey as a lender at TMP today. Thus, investing with The Money Platform is an additional route to diversifying your investment portfolio.
As with any financial product, P2P lending has its own set of advantages and drawbacks.
Here are a couple of factors that ought to be considered before investing in the P2P lending space:
1. Risk of default
As with all investments, there is a risk of default as borrowers may not have a strong credit history or collateral. While platforms attempt to mitigate this risk by employing credit checks and risk-based pricing, lenders should be prepared for the possibility of borrower default.
TMP tries to mitigate the risks involved in the following ways:
- Equifax Report
- Carrying out KYC due diligence checks
- Offering means in which paying back loans can be easier such as repayment plans.
By ensuring these three things are in place, TMP attempts to position the lender in the best position possible to be protected from the risk of default.
2. Limited regulation
Historically, P2P lending has not been a very regulated space as it is a relatively new industry.
However, in the UK, the P2P lending space is directly regulated by the Financial Conduct Authority (FCA) and is regularly reviewed.
More recently, the P2P industry saw the introduction of PS22/10 regulations. This brought a more robust registration process for investors to ensure that they are completely aware of the risks involved with P2P investments, as well as the risks involved in lending through their chosen platform.
You can see if this appeals to you by registering and attempting our appropriateness test here.
3. Lack of liquidity
P2P lending investments are generally less liquid than traditional investment options, such as stocks or bonds. This means that if an investor needs to access their funds quickly, they may face difficulty retrieving funds from the borrower or may face charges to withdraw early. You can read more about this in our ‘All to know about P2P lending’ post. At TMP lenders can withdraw their funds at any time, once they have passed all relevant AML checks carried out by TMP.
4. No deposit protection
Unlike traditional banks, P2P lending platforms do not offer deposit insurance, such as the Federal Deposit Insurance Corporation (FDIC) in the United States. Neither are lenders funds protected by the Financial Service Compensation Scheme (FSCS). This means that if the platform went bankrupt, investors could lose their entire investment.
Here are a few ways in which The Money Platform ensures that Lenders’ funds are secured even if we cease to trade:
- Lender deposits are held in segregated accounts.
- Loans made between borrowers and lenders do not form part of the Money Platform’s assets.
Please feel free to read more here about the Lender’s risks involved.
To conclude, peer-to-peer lending offers a unique alternative to traditional bank loans, providing both borrowers and investors with increased accessibility, lower fees, and faster approval processes. However, these benefits come with inherent risks, which must be given ample thought before deciding to invest the peer-to-peer way.
As with any investment, it is crucial for individuals to conduct thorough research and consider their appetite for risk before participating in P2P lending. Head over to our FAQ if there are any burning questions that this article did not answer in as much detail.
