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Need a loan? Peer-to-Peer lending is becoming popular as Aussies get more savvy about their borrowing needs. So What is it? And what do you need to know?
Peer-to-Peer (P2P) lending is a financial arrangement between an investor and a borrower with a lending ‘marketplace’ or ‘lending platform’ (instead of a traditional bank), in the middle.
P2P Lending works like this: When you want to borrow money, your eligibility is assessed by the provider of the loan. The lender conducts a range of checks on your income, ability to save, credit rating and reputation as well as your employment history – pretty much in the same way a bank does when you apply for a loan. Then, when your loan application has been assessed, you’re matched with an appropriate lender.
So far, P2P sounds like a bank, right? Sure, many of the principles are the same.
But P2P lending matches an investor directly with a borrower.
The ‘marketplace’ in the middle is where all the checks and balances take place. This is essentially an automated process conducted online.
For investors, the yields are often attractive, but there are also benefits for borrowers, says Julie Nipperess, Money Coach at Step Up Financial Group, Orange.
Benefits such as:
“As a borrower, you can snaffle an interest rate lower than those offered by many of the banks,” says Julie.
“Interest rates are low across the board right now, but on a P2P loan, interest rates are tailored to each borrower individually, depending on your credit history and ability to pay back the money,” she says.
Essentially, if you have a good credit history, then you’re likely to be offered a lower interest rate.
“Interest costs you a lot over the course of a loan, so if you’re offered a lower rate by a P2P lender, then obviously it’s something to consider,” says Julie.
Banks have long been criticised for their never-ending paperwork and drawn-out, arduous application processes. P2P lending offers a speedy alternative and because everything is done online, it makes the entire transaction and application process much faster.
There are fee savings too. Because P2P transactions take place in the ‘virtual’ space, your lender doesn’t have an actual building to pay for, and there isn’t a massive workforce to consider, along with staff holidays, sick leave and workers’ comp… etc.
“The lenders do make a profit, but without big overheads and administration costs, fees can stay low and these savings can be passed onto consumers,” says Julie. “That also makes these loans pretty attractive in a lot of circumstances.”
After the Royal Commission into Finance and Banking which uncovered some pretty woeful tactics by the big lenders, P2P is considered by many as a ‘breath of fresh air’ – an innovative option that’s making headway in the lending landscape for personal loans, business finance and even home mortgages.
More choice is always a good thing because it creates healthy competition in the marketplace. This means lenders to have to work harder to get your attention, and your business.
The good news for consumers, is that P2P Lending is governed by a fairly strict regime of financial regulations in Australia.
“But proceed with caution,” warns Julie. “Always, always, ALWAYS do your homework before you make a big financial decision like borrowing money.”
Julie explains that because the P2P environment is pretty new to Australia, it’s highly recommended that you do your homework on all the lenders, to make sure they’re legitimate.
“While the financial sector does have many consumer protections in place, scammers can, and do, always find ways around the law.”
When you’re sure that the lender is registered and licensed, make sure you also review the fine print BEFORE you sign anything – check lending policies as well as the specific terms and conditions of your loan.
Julie says DOUBLE CHECK the details like the interest rate over the term of the loan.
Some lenders offer low ‘introductory rates’ that automatically rise after a set period of time. You also need to know if there are financial penalties for paying off the loan early, or paying off extra instalments when you can.
“If you are considering borrowing, talk to us first so we can look at your overall financial position . It’s important that you access to the money you need, but more than that, it’s really important that you get the right loan for your individual circumstances,” says Julie.
“A low interest rate is a great feature, but it’s not the only thing you should look for in a loan,” she explains.
“The same advice stands if you’re interested in the other side of the transaction – investing through a P2P arrangement. Before you proceed, let’s talk it over together, to assess the possible risks and the potential returns and make sure the investment stacks up and works within your overall financial plan and goals.”
This is general advice and should not be treated as personal advice. Julie Nipperess is an authorised representative of Step Up Financial Group Pty Ltd ASFL No: 512509.