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Summary
- Peer-to-peer lending help borrowers take money directly from other individuals.
- The interest rate in the case of peer-to-peer lending is set based on the creditworthiness of the borrower.
When individual or businesses take loan directly from other individuals, it is called peer-to-peer lending or crowdlending. The process works on many-to-many lending pattern and helps in eliminating the middleman between lenders and borrowers.
It has been more than 15 years since peer-to-peer (P2P) lending first started in the UK. This financing tool helps lenders to earn a higher rate of interest and allows borrowers to pay less by removing the financial intermediaries between them.
There are various websites or platform available where one can register to either get or lend money. These websites act as a marketplace for lending. The platform then set the rates and terms of lending and help to carry out the transaction.
What is the process of P2P lending?
- An investor who wishes to lend the money opens an account with the site and deposit the amount he or she wishes to lend.
- Set the interest rate at which you would like to lend your money.
- On the other hand, a loan applicant submits a risk profile to make the site understand the level of risk one can take and the interest rate they will be able to pay.
- The interest rates are set based on the creditworthiness of the borrower or applicant.
- Followed by which, borrowers can view applications and accept one.
- Finally, the platform handles the disbursement of money.
Benefits of P2P lending
- P2P lending saves time as the borrowers can get the funds without visiting the bank or financial institution.
- P2P lenders generate good returns compared to traditional lenders.
Drawbacks of P2P lending
- Borrowers may default on the payment; means they may not be able to refund the borrowed money. So, the lender needs to be aware of the default rate before lending their money, as most of these websites do not offer any compensation scheme in case of default.
However, if you are lending your money through FCA authorised P2P lending platforms, the loss suffered in case of default can be offset by the interest received from other P2P loans before the income is taxed; provided the lender should be legal at the time of default and is liable to pay tax in the UK.
- Apart from the default of the borrower, the platform can also go bankrupt, and you may not be able to track the borrower as the details lie with the site only.
- Also, the P2P process is said to have removed the intermediator, but this is not completely true as the fee is charged on the transactions.
- The interest earned from P2P lending is taxed similarly to any other interest received. However, the interest income can be tax-free if your P2P loans are held in your Innovative ISA, which generates tax-free interest.
There are multiple platforms available that supports P2P lending, one can read the terms clearly and then only opt for them.
