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Peer-to-peer lending: Advantages and disadvantages for loan customers

For those looking for a personal loan, taking out a peer-to-peer loan has provided an alternative option to traditional banks and building societies. However, as a fairly new form of alternative finance, P2P lending is a concept that many won’t be familiar with.

In this guide, we’ll take a look at the advantages and disadvantages of peer-to-peer lending for borrowers, so that you will be able to work out if a P2P loan is the right option for you.  

Online application for a P2P loan is fast and convenient.You still need to pass a credit check and other internal checks to acquire the loan
You can often access lower rates than you could from traditional lenders like banks and building societies.The loan may include an arrangement fee payable to the P2P firm
Getting an initial quote will not affect your credit score 
P2P lending provides an alternative option for a loan to traditional lenders 
Though loans are from individuals, you only need to deal with the P2P platform 
P2P loans are unsecured and can be more flexible than some traditional loans 

Advantages of P2P lending for borrowers

Peer-to-peer loans can offer quite a few advantages over other forms of borrowing, such as more competitive interest rates, flexible terms, and a fast and convenient online application process. Let's have a look at these in more detail.

Online application for a P2P loan is fast and convenient

As peer-to-peer lending platforms are typically entirely online, it means that the application process is quick and convenient. This can be very handy if you wish to secure your funds quickly. Most P2P platforms have a waiting list of investors to provide loans to borrowers which, when combined with an automated matching process, means turnaround time on getting your money can be very quick – sometimes as little as a few hours.

Here at Lending Works, we have taken great care to make our application process as easy and quick as possible. Getting a personalised quote takes less than two minutes; then, if you're provisionally accepted, it's simply a case of providing a few more details and finishing your application. We'll then make a final decision and get back to you with a loan offer if you're approved. Once you accept, the funds will be transferred. The whole process is quick and total turnaround time is around typically less than 48 hours.

You may be able to access lower rates

With peer-to-peer lending, borrowers can often access loans with interest rates lower than they could obtain from traditional lenders like banks and building societies. As investors are providing money directly to borrowers through a P2P platform, there aren’t the typical overheads associated with most financial service providers, which often allows both parties to benefit from more favourable rates.

Getting an initial quote will not affect your credit score

If you're interested in getting a personal loan through peer-to-peer lending, you can get a personalised quote that doesn't affect your credit score. This will give you a better idea of the rate you'll be offered and the affordability of any prospective loan. 

When you initially enquire about a loan, most reputable P2P platforms will only perform a 'soft search' on your credit history, which won't show up in future searches by other providers. This allows you to get the information you need without your credit score being affected for future finance applications.

At Lending Works, we offer a free personalised quote that won't impact your credit history. It's only when you choose to accept the quote and progress your application that we will leave any footprint on your file. 

P2P lending provides another option for a loan to traditional lenders

For those looking for an alternative option to traditional banks or building societies, a peer-to-peer loan provides a great alternative that is well worth exploring. 

P2P platforms now fulfil an important role for those looking towards alternative finance for some of their many financial needs, which is creating a healthier marketplace for consumers.

Though loans are from individuals, you only need to deal with the P2P platform

Even though peer-to-peer loans are financed by investors rather than a bank, the P2P lending platform ensures things stay simple by acting as an intermediary between parties. This means that, although you’re receiving a loan funded by many individuals, you won't ever need to contact them (both lenders and borrowers remain anonymous to each other), and all repayments are made through the platform. 

This setup offers the best of both worlds: lower rates are often available for borrowers with no middleman present, but support is still provided by the P2P platform. You can find out more about how this process operates in our guide to how P2P lending works.

P2P loans are unsecured and can be more flexible than traditional loans

Because peer-to-peer loans are unsecured, there is no need to provide any collateral, so you won't need to tie any personal property to the deal, as is the case with many other types of borrowing. This also ensures that the application process remains quick and uncomplicated, allowing you to access funds in a shorter period of time.

In addition, P2P loans offer much more flexibility than other types of loan. For instance, at Lending Works, you can make an overpayment or even settle the balance of your loan at any time, with no extra costs involved. You can even change your monthly repayment date to suit your own finances, so if your payday is on a certain date each month, you can set your loan repayment to take place on the same day. You can find out more about the flexible ways you can manage your loan in our help centre.

Disadvantages of P2P lending for borrowers

For borrowers, P2P loans can be a good alternative to traditional lenders; however, there are still some drawbacks that you should get to know before you apply. Let's take a closer look.

You still need to pass a credit check and other internal checks to secure the loan

Though peer-to-peer lending removes the needs for traditional banking, it doesn't mean that the underwriting process has been left behind. Any P2P loan platform that you apply to will require you to pass a credit check to ensure you are creditworthy, as well as other internal checks set by the platform. This is mainly done to protect the funds of the investors who are providing the loans, as it helps to identify those who are more likely to default on their loans.

If you know that your credit rating is not the best and you're thinking of applying for a P2P loan, it's probably a better idea to work towards improving your score beforehand. This is because, even if your application is initially accepted, an underwriter may carry out a full credit check later, which will show up on your credit record and impact it negatively. 

You may need to pay an application fee

When you're applying for a loan with a bank, building society, or some other lender, you'll sometimes need to pay a loan arrangement fee. However, peer-to-peer loans do typically carry an arrangement fee. 

P2P platforms make money by arranging your loan i.e. by matching lenders and borrowers, so most charge an arrangement fee on each loan they match. This fee may also go towards any security measures put in place to protect investors from defaulted loans. This is something that you should be aware of upfront, so that you're not surprised later on. However, these fees are normally built into the cost of your loan and won’t actually require any upfront payment by you.

Here at Lending Works, we do charge fees on our P2P loans. The amount that you'll need to pay will depend on how much you're borrowing, how long your loan term is, and how creditworthy you are. There are two fees payable: one to cover our overheads and another that contributes to our Lending Works Shield, and these will be clearly set out in your loan offer.

However, unlike other lenders, we don't charge any fees if you want to overpay or settle your loan early, giving you the freedom to manage your repayments without being penalised.

Having considered both the advantages and disadvantages of peer-to-peer lending for borrowers, you should have a clearer idea of how a personal P2P loan could fit into your own finances. 

As with any loan, it’s important to take your time and consider whether it’s the right choice for you. You can find out more about our P2P lending services in our help centre, and don’t hesitate to contact us if you have any questions about securing a loan.

9.9% APR Representative

The rate you are offered depends on your personal circumstances, the loan amount and the repayment term, and may differ from the Representative APR. We will confirm your rate when you receive your personalised quote.

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