If you’re looking for a loan, you might have come across a few different terms you’re not familiar with. The world of finance is changing quickly, and new terms like “P2P” are more common than ever. P2P stands for peer-to-peer lending, and this is a much different concept of lending compared to a traditional personal loan from a bank or financial institution.
This is a relatively new option, so it’s no surprise that there are a lot of misconceptions about P2P vs. a traditional bank loan. In this guide, we’ll share how P2P loans differ from a bank loan as well as everything you need to know about this increasingly popular option.
What Is a P2P Loan?
In the past, the only way to get a loan for larger personal purchases would be by applying through a traditional bank for a personal loan. The bank would then consider your credit, income, and debt to determine whether you were worthy of a loan.
On the other hand, a P2P loan is a loan from your peers. As the name implies, an individual or group uses a digital lending platform to lend money to another individual or small business. These can come from friends, family, or even complete strangers.
How Does a This Type of a Loan Compare to a Bank Loan?
The real difference between these two types of loan is the lending party. If the funding for the personal loan comes from individual lenders and goes to another individual or small business, this is a P2P loan.
On the other hand, if the funds for the loan come from a bank or credit union, this is a personal loan. Like a bank loan, P2P loans still require the borrower to pay the lender back with interest.
However, one key difference is in the type of loan (secured vs. unsecured). Most secured loans like mortgages and car loans are offered through banks or credit unions. This means there’s something like a house or car used as collateral, protecting the bank in case of default. P2P loans are usually unsecured. There is no valuable asset used as collateral, so it’s riskier for the lender.
How to Get a P2P Loan
In recent years, it’s become easier than ever to secure a P2P loan. These are generally achieved through a third-party lending platform. This makes it easy for borrowers to be paired with the right lenders and vice versa. In Australia, some of the most well-trusted P2P platforms are:
- Marketlend (Business loans)
- MoneyPlace (Personal loans)
- RateSetter (Personal loans)
- ThinCats (Business loans)
- Wisr (Personal loans)
From there, you’ll need to continue through an application process not unlike at a traditional bank or credit union. The lender still needs to decide whether or not you or your small business is creditworthy. Most require the following:
- Statement – A formal statement is often required. This includes all the necessary documentation, payment plan, and so on.
- Financial documentation – You’ll need to provide documentation on your income, expenses, and ability to repay the loan.
- Credit requirements – Because these are riskier loans for the lender, there are typically high credit requirements. Your credit rating and history will be an important part of the application process.
Why Choose a Peer-to-peer Loan?
With so many requirements, why opt for a P2P loan over a traditional personal loan? There are a lot of reasons why these are growing in popularity for a variety of consumers and businesses.
First, these allow you to work with an online lender. This simplifies and speeds up the process, making it easier for those who might not have the time for a traditional loan application. In addition, these lenders might be more flexible about who they’re willing to work with. Those with lower credit ratings or less financial history could benefit from this option.
However, there are still some cons related to P2P lending. These loans generally face higher fees and shorter loans, contributing to more spent over time. They might also require a cosigner or collateral. Because the lender is an individual or collection of individuals, there is a greater sense of personal responsibility.
P2P Loan vs. Bank Loan: Which Is Best?
There is no clear option of whether a P2P loan or a personal loan is right for you. Like with all financial decisions, it’s important to look at the big picture before agreeing to any terms. While it might be easier to get an online peer-to-peer loan, consider whether this is the best solution for you.
There are pros and cons of both options, but we can all agree it’s nice to have a lot of options when choosing a loan. The rise of P2P lending shows that technology will continue to play a large role in lending and banking in the future.
That being said, talk to a financial expert before choosing a loan option for your current financial situation. The experts at Debt Busters are on your side, and they can work with you for the best loan solution no matter your long-term goals. Call us today on 1300 368 322.