Finding a personal loan with favourable terms can be difficult no matter what you're borrowing for. If you're looking for a competitive personal or business loan, consider the benefits peer-to-peer lending has to offer.
What is peer-to-peer lending?
Peer-to-peer lending involves borrowing money from individual investors, where the "lender" simply acts as a facilitator for the loan. By lending their money, the investors gain access to an attractive fixed income asset class that can yield better returns than other investment options. Borrowers can also take advantage of lower rates that are based on their credit scores. All this is facilitated by a peer-to-peer lending platform that connects the people looking to borrow with people looking to invest.
RateSetter Unsecured Personal Loan - 3yr Variable
RateSetter Unsecured Personal Loan - 3yr Variable
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RateSetter Unsecured Personal Loan - 3yr Variable
RateSetter offers this unsecured personal loan with a fixed or variable rate. Receive a tailored interest rate from 6.89% p.a. based on your risk profile.
Peer-to-peer (P2P) providers do not match individual lenders directly with a borrower. Rather, they enable the lender to invest in a portfolio of consumer loans. In other words, the P2P provider facilitates a platform where investors can finance a portfolio of loans and earn interest on what they lend, while borrowers are given an individual rate based on their credit score.
Borrowers. To borrow, you submit an application with the P2P lender. The provider then evaluates your eligibility for a peer-to-peer loan by verifying your identity, credit history, employment and financials. It will assess the risk of the loan and give you a personalised interest rate. You will generally need to have a good credit history and be in a secure job to be eligible. After approval, your loan will be funded by one or several investors that choose to take you on. The P2P provider will usually deduct an application fee from the amount transferred.
Investors. Potential investors review the available applications on the website and identify the borrowers they would like to fund, in part or in full. Investors will not be able to see any personal information from borrowers. Funds are then transferred to the borrow and their repayments will be made to the investor based on how much of the loan they funded.
What lenders offer P2P loans in Australia?
Various lenders offer peer-to-peer loans in Australia, each with its own product offering and rate. The table below is a quick guide to Australia's P2P lending landscape:
Hi, I'm Elizabeth from finder.com.au.If you're taking out a personal loan, you may want to consider a peer-to-peer loan.These lenders can offer rates up to half that as low as bank unsecured personal loans because they're tailored to you.So let's see how they work. When you apply with a peer-to-peer lender you'll be approved or denied just like when you apply with a bank but if you are approved, the peer-to-peer lender won't be the ones lending you the money. Instead they'll match you to an investor or a group of investors.The investor or group of investors agree to provide funds to these borrowers and in exchange earn interest.So let's talk about interest. Peer-to-peer lenders can offer very competitive interest rates because they use something called risk-based pricing.This basically means that if you have a very high credit score or a good borrowing history you can be rewarded with a lower rate.If you have a lower credit score or a shaky borrowing history you will receive a higher rate or you may not be approved.While you won't receive your final interest rate until you apply with a peer-to-peer lender you can receive a rate estimate without it affecting your credit score.For more information about peer-to-peer loans and to compare them head to finder.com.au.
The Government Backed Guarantee on Deposits was set up to protect investments up to $250,000. They do not apply to funds in peer-to-peer lending as it only applies to institutions authorised by the Australian Prudential Regulation Authority (APRA).
How peer-to-peer is changing the way Australia lends
When peer-to-peer personal loans launched in Australia, one new aspect about these loans was that the interest rate was personalised to the borrower. Now, banks and other non-P2P lenders have been embracing this. You can now find many risk-based personal loans from major banks as well as smaller standalone lenders and credit unions.
Many banks and lenders are also offering more competitive rates and embracing innovative technology in order to remain competitive.
Weighing up the benefits and drawbacks of peer-to-peer loans
Borrowers are able to secure loans at rates generally lower than those offered by banks
A speedy application process that's administered online
P2P lenders offer lower loan amounts than banks, usually only up to $35,000 for a personal loan.
The opportunity to diversify your investments in addition to spreading your funds over several loans for minimising your risks
Lenders will need to know that there is no government-backed guarantee on the funds they provide.
"How do I compare my options?"
Are they compliant? Check the credibility of the website or platform that you're considering. They should have a credit license listed on the bottom of the page and check what banks or services they are affiliated with.
What rates are you being offered? The rates offered by the peer-to-peer lender are usually lower than those offered by the banks, but you should also see whether they are fixed or variable.
What fees are associated with your account? Take a look at the comparison rate to see how much the loan is likely to cost you with the fees included, and remember to check whether you will need to pay any upfront fees to set up the loan.
What are your loan terms and the amount you are borrowing? Some peer-to-peer lenders may not be able to offer you as high a loan amount as other banks or lenders, so check to see that you'll be able to borrow what you need for as long as you need it.
Have you researched the lender's reputation? The lender's reputability should also form part of your comparison. You might want to read independent customer reviews online, see how easy the lender is to be contacted, and how transparent they are with their fee and rate information.
What are the requirements for an investor? As a borrower, you want to ensure the person you will be borrowing from is reliable and that the lender has strict guidelines in place to ensure no unscrupulous investors find their way into the lending network. Check out the lending requirements before you apply to see the type of people you will be borrowing from.
Are you eligible to become a borrower? While you want to check that you are eligible, you also want to ensure that the peer-to-peer network doesn't have borrower eligibility criteria that are too relaxed. Some overseas peer-to-peer networks who started lending to borrowers with bad credit failed due to a high number of defaulted loans, so you want to ensure the lender you go with doesn't engage in high-risk borrowing behaviour
Peer-to-peer lending is an alternative credit option to consider. With competitive rates, quick approval times, and not to mention a way for investors to diversify their portfolio, peer-to-peer lending is making its mark on the credit industry.
Taking out a loan through a peer-to-peer platform is just one part of the equation – you may prefer to become the lender and invest your money instead.
When you invest in P2P, you're lending money to one or several borrowers, depending on the platform. By doing so, you can get a higher return on your money than you normally would if you'd put your money into the bank or even the stock market. Your interest payments are usually fixed and paid at regular intervals for a specified term length.
When comparing options, you should consider the fund's risk, term length and interest rate. Depending on the platform, you may also have the option of investing in specialised loans, such as renewable energy or healthcare.
Before you invest, it's important to understand some P2P options can be risky. Essentially, if a borrower defaults on their loan, you could lose your investment. Some platforms, such as RateSetter, have additional safety measures to protect investors against loss, but not all P2P platforms do this. Check the platform's history before investing and do your homework.
Not all P2P platforms have investment options for everyday (retail) investors, but of the few in Australia that do, interest rates can be very competitive. You can compare some of the platforms available in the Australian market in the table below.
Compare Peer to Peer investments
Updated December 6th, 2019
Disclaimer: Investments made through a P2P lending platform are not protected and are subject to risks including credit risk (defaults) and liquidity risk. These investments are not subject to review by the Australian Financial Complaints Authority. Actual returns may vary from the Expected Returns declared by the Providers. Read the PDS for details before investing and consider your own circumstances, or get advice, before investing.
Frequently asked questions about P2P lending
The funds will come from an individual or group of investors. These investors will have signed up with the P2P lender you applied with and have chosen to lend you money (either by choosing your loan specifically or by you meeting the investor's credit requirements). Remember that none of your personal information will be divulged during this process.
A peer-to-peer personal loan is usually repaid via direct debit. The money is then transferred either directly to the investor or into an account that they can withdraw from.
Investors either select a risk grade that they are willing to lend to – low risk, high risk, etc. – and then are matched automatically with borrowers that match it or they choose loans individually. These loans can be funded in part or in full.
Eligibility criteria differ between lenders but you generally need to be over the age of 18, employed and earning over a certain amount each year (for example $35,000 p.a.) and have good credit.
Yes – check the table above for details of which lenders offer business loans.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
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