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What Is Peer-To-Peer Lending?
Peer-to-peer lending (also known as P2P lending) is still a relatively new phenomenon, but it’s becoming an increasingly popular service for Australians in need of some extra cash. . As with any new technology there are still some kinks that are being ironed out and risks that potential peer-to-peer-lenders need to be aware of. So that you don’t send your money down a rabbit hole or get caught up in high repayments, we’ve decided to look at the ins and outs of peer-to-peer lending. When used right, P2P lending can be a great way to put a little extra cash in your hands.
What is peer-to-peer lending?
In its most basic sense, peer-to-peer lending is a business that matches borrowers looking for an alternative to major financial institutions, with potential lenders. Peer-to-peer lending, or crowdfunding, is designed to give lenders the opportunity to receive higher returns than they would with alternative investment products and borrowers the opportunity to borrow at lower rates.
How does peer-to-peer lending work?
Peer-to-peer lending is in most cases facilitated by P2P lending companies. These companies provide the match-making platform (and often credit-check the borrower) to facilitate the crowdfunding process, but the actual money comes from individuals or companies.
In some cases, investors can choose the kind of loan they provide and the rate of interest, but this is mostly determined by the P2P lending company. Borrowers using peer-to-peer lending then make repayments through the platform that will be received by the investors. The P2P lending companies generally only make money from the fees associated with facilitating this process.
P2P lending platforms are required to have an Australian Financial Services (AFS) licence to operate, so you should make sure your one does before sending any money.
What are the risks of peer-to-peer lending?
For lenders, there are risks associated with borrowers being unable to pay your loan. Some platforms maintain a fund to cover losses associated with borrowers defaulting on their P2P loan but this isn’t always the case so it’s a good idea to run your eyes over the Product Disclosure Statement (PDS) so you know exactly what you’re getting yourself into.
Borrowers on the other hand may look as P2P lending as a great way to receive funds outside the traditional financial institution route, but if you have a bad credit history you may be penalised with hefty fees associated with accessing the platform and your funds.
Tips to successful peer-to-peer lending:
- Do your research – With P2P lending it’s vital that you do your research, and shop around. If the crowdfunded loan isn’t any better than that being offered by traditional lenders it might not be worth the stress and lack of security.
- Read the PDS – As with anything associated with lending money, with P2P lending the devil is in the detail. Make sure you give the PDS a thorough read so you’re aware of all the risks and so you don’t end up with a nasty financial surprise at the end of your loan.