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Peer to Peer Lending: What is it and how does it work?

January 14, 2020 6 minute read
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Peer to Peer Lending: What is it and how does it work?

What is a peer to peer loan?

Peer to peer lending refers to the process of matching investors with borrowers. It is also commonly known as ‘marketplace lending’ because it often takes place through an online platform, such as a website. Basically, peer to peer lending enables you to borrow money without going through a traditional lender, such as a bank. It is also unique because it can be used by both individuals and companies that are looking for a loan. 

Naturally, there are several advantages and disadvantages of peer to peer lending in business, as well as in your personal life. In this article, we’ll run you through the basics of peer to peer lending in Australia and what it might mean for you. 

How does peer to peer lending work?

In most cases, peer to peer lending involves a financial service provider (‘lending platform’) that works as a middleman between investors and borrowers. When a borrower applies for a loan, the lending platform will evaluate their suitability for finance and match them to an appropriate investor if possible. Depending on the provider, an investor can decide how much they want to invest and how they’d like their money to be used. 

An investor is able to choose whether they would like to one singular loan or invest in a portfolio of loans. In some cases, investors are able to select some of the particular like the interest rate on the loan and the repayment period. A lot of the time, however, these decisions are made by the service provider.

What are the interest rates on a peer to peer loan? 

A lot of borrowers are attracted to peer to peer loans because they can get a cheaper rate of interest. Conversely, investors may be interested in providing a loan because they can earn significant interest on their cash. Due to the fact that every lender/investor is different and every borrower’s financial situation is different, we can not speculate on the interest rates of peer to peer loans. So, it may be worth looking at services that compare peer to peer lending rates ahead of deciding on a provider.

How are repayments made?

When a borrower makes a repayment on a peer to peer loan it is collected by the service provider and then distributed to the investor. The service provider will usually arrange for a direct debit to be set up from the borrower’s bank account. Instalments will be directly debited as per the prearranged payment schedule across the life of the loan. At the end of the loan period, the service provider will return the investors capital. 

How safe is peer to peer lending?

Peer to peer lending can be a safe way to lend and borrow money. However, there are risks. Each lending platform is unique. So, you should always do your research to ensure you trust a provider before investing or borrowing through them. Ultimately, in peer to peer lending, most of the risk is carried by the investor. If a borrower is unable to repay their loan then this will likely result in an investor losing some or all of their money. 

What investors should be aware of 

If you’re interested in investing your money in peer to peer lending it’s important you choose a trustworthy service provider. A peer to peer platform operator is required, by law, to have an Australian financial services (AFS) license and must run their scheme in line with the Corporations Act. Before you invest it is important to check ASIC Connect’s Professional Register to ensure the service provider has an Australian Registered Scheme Number (ARSN). It is essential that all investors ask the following questions before handing over their money:

  • Are the loans secured or unsecured?
  • What will the interest rate on my cash be and who will decide this?
  • Can I choose the loan I would like my money to be invested in?
  • Can my investment be spread over multiple loans?
  • How long will it take me to get my money back? 
  • What is the repayment period on the loan I am investing in?
  • Can I change my mind? Is there a cooling-off period?
  • What if the borrower defaults? 
  • What will the service provider do to recover my money?
  • Will I need to pay a fee to the service provider? How much will it be?

If you are unable to get the answers to these questions, then it may be worth considering other investment options. Entering into an investment without all the information is risky, as you could lose more than you gain. So, make sure you do your homework before signing a contract. 

What borrowers should be aware of

Reputable peer to peer lenders have the same responsibilities as normal lenders. All of the appropriate checks must be completed and lenders must always comply with the code of responsible lending. Before you agree to a loan contract it is important to shop around and compare peer to peer loans online. It is also important to consider the fees and charges that could be associated with a loan. Make sure you verify anything that you are unsure about before signing an agreement. Although a peer to peer loan might seem like a convenient way to avoid high-interest rates, it is important to understand what you are getting yourself into. 

How Jacaranda Finance could help

Peer to peer lending isn’t your only option when it comes to alternative finance. If you’re looking for cash that can be accessed without the hassle associated with traditional lenders – why not apply with Jacaranda? 

At Jacaranda Finance we don’t offer peer to peer loans. We do, however, offer personal loans between $300 and $10,000. Jacaranda is committed to providing Aussies with fast, convenient and safe cash when they need it. You could apply for a personal loan with Jacaranda in just a few short minutes. If you submit your application during AEST business hours, we could have an outcome for you in just 60 minutes. 

The Jacaranda team conduct a fair and thorough assessment of all personal loan applications so Aussie consumers get the best chance possible at approval. Not even bad credit has to stand in your way as we can provide bad credit loans. Since the application itself will cost you nothing, why not get started on your application today?

How much does a personal loan cost?

If you’d like to get an idea of what a possible loan with Jacaranda could cost you, try using our loan calculator to get an idea of your potential repayments. Alternatively, you can head to our costs page for a more thorough breakdown of the rates and possible fees associated with a personal loan. 

Jacaranda believes in 100% transparency and will be upfront with any costs. However, we urge all our clients to assess whether a loan product is right for their individual circumstances. 

If you’re approved for finance, all of the terms and conditions will be clearly outlined in your loan agreement. Jacaranda encourages all borrowers to read through their agreement carefully. This will ensure you’re aware of any possible charges your loan could incur for late or failed repayments. If you have any questions, get in touch with the team or head to our FAQ page for more information.

Want to read more?

Enjoyed this article on peer to peer lending? For more information and tips on a wide range of topics, head to the Jacaranda blog. We’ve got the details on how you can save money on water bills, save cash this Christmas, and make your Centrelink income work for you! 

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Last updated: 13/05/2020, 3:57pm

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