Need a loan? Then ask a peer

Bessie Hassan | Money Expert at finder.com.au

It may be unchartered territory for many, but peer-to-peer (P2P) lending can offer unique benefits to borrowers. If you’re looking for finance, a P2P loan could be worth considering.

While it may be a less traditional form of finance, P2P lending can provide you with a competitive interest rate and a faster turn-around compared to the conventional finance options offered by most major banks.

Interestingly, a finder.com.au survey revealed that the majority of Australians think that a good credit score should come with perks. That is, 67% of people believe that a good financial history should mean better interest rates on products like loans.

Fortunately, P2P lending could be the solution for many borrowers with a good credit score. So how does P2P lending work?

P2P lending involves borrowing money from an anonymous investor who facilitates the loan through a third party organisation. With P2P lending, personalised interest rates are offered, which are determined by the borrower’s risk profile. For example, if you have a good credit score, you can potentially enjoy a lower interest rate because you’re considered a responsible borrower.

The transaction is facilitated by a P2P lending platform that connects borrowers with investors. While P2P lending can allow you to enjoy lower interest rates and a faster application process, there are some things you need to keep in mind before you choose to go down this route.

Here are four things you need to know about P2P loans:

• Check what fees are involved

When reviewing your options, keep a close eye on the fees involved to ensure that you’re not paying more than you can afford. Check out the comparison rate to get a clear understanding of what fees are included with the product. You’ll also need to review the application/establishment fees, which can range from 3-5% of the loan amount (depending on the platform/provider).

• Ensure the lender is compliant

As P2P lending isn’t backed by a large corporation, do your due diligence by researching the reputation of the platform you’re thinking of signing up with. A quick way to do this is to check for a credit license. This should be listed on the lender’s website. You can also check to see what banks the lender is affiliated with to get an idea of whether or not they’re compliant by industry standards.

• Make sure you can borrow enough

P2P platforms typically offer lower loan amounts, so you may only be able to borrow up to $50,000 for a personal loan. This could be restrictive, depending on your loan purpose and the amount you need to borrow. Keep this in mind before signing up with a P2P lending platform.

• Consider if it’s the right option for you

Once you’ve wrapped your head around the ins and outs of P2P lending, decide whether this is the right type of finance for you. Remember that you generally need to have a good credit history and a secure job to be eligible for a loan. You also need to be aged 18 years or over and you need to be earning a certain amount each year to show that you can comfortably afford to meet your ongoing loan repayments. If you don’t satisfy these requirements, you may not qualify for a P2P loan.

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By leveraging technology and offering tiered interest rates to borrowers based on their risk profile, P2P lending can offer a cost-effective and convenient finance solution. However, like any financial decision, make sure you weigh up the pros and cons and carefully consider if this is the right type of finance for your personal situation.