If you're looking to borrow from a non-traditional lender, a peer to peer provider might be the personal loan choice for you. The idea of p2p lending might have sparked your interest, but it also comes with a lot of questions.
So what exactly is peer to peer lending, and is it the right option for you?
Let our quick lowdown on all things p2p lending answer those tricky questions and help you decide:
What is P2P lending?
What happens when you remove the banks from the borrowing equation and connect investors directly with borrowers?
According to the peer to peer movement, you'll get a better personal loan deal with lower rates and fees.
Peer to peer platforms aren't just limited to the personal loan world! Theoretically, they you can apply peer-to-peer lending to all sorts of services including car-sharing, house swaps, clothes swaps and more..One of the most well-known examples is a house swapping platform like AirBnB, allowing homeowners to rent out their property to holiday-goers for a short stint. The homeowner gets some much-needed cash and the holiday-goer benefits from paying a cheaper amount for their overseas accommodation.
Traditional peer to peer lending and borrowing works in the same way, as an individual investor uses the P2P lending platform to loan money directly to a borrower.
The investor benefits from earning a profit through the interest charged (and also gets that good feeling of helping out a stranger) whilst the borrower receives a more competitive rate, lower fees, and often a faster approval process than those by the big banks.
Who offers peer to peer loans in Australia?
Australia is only just jumping full-force into the world of p2p lending, but new options do continue to pop up.
Some of the most prominent peer to peer lenders in Australia are:
SocietyOne: Launched in Australia back in 2011, SocietyOne has a slightly different lending model to the traditional peer to peer platforms overseas. Instead of connecting individual investors with strangers, the platform connects wholesale investors with borrowers.
Plenti: Originating in the UK, Plenti was brought to Australian shores in 2014 and was the first peer to peer platform to offer investment opportunities to everyday Aussies. It is also known for introducing the concept of a provision fund, aimed at protecting lenders if the borrower defaults on the personal loan.
MoneyPlace: Newer to the Australian market is Melbourne start-up MoneyPlace. Like SocietyOne and Plenti, this P2P provider offers competitive rates to creditworthy borrowers. In 2015, MoneyPlace entered into a five year $60 million strategic partnership with Auswide Bank, which will support the P2P lender during its initial growth stage.
You can compare the P2P providers side by side in the comparison table at the top of this page by interest rate, comparison rate (a calculation that shows the cost of both the rate and fees) and the features.
Why would a P2P lender give me a better rate?
By removing the banks from the borrowing equation, peer to peer lenders have vastly lower overheads, as they don't have to pay dividends back to shareholders.
Run entirely online, P2P lenders don't have to pay the high cost of branches and managers either, which reduces costs. All of these costs translate into savings for borrowers.
Peer to peer loans do have their own fees, so it’s important to read up and make sure that a loan suits your lifestyle.
What's the difference between a P2P lender and a credit union?
Just like peer to peer lenders, credit unions are a part of the “strangers helping strangers” social movement. They are completely customer owned and run by the philosophy of passing profits back to customers, not to shareholders.
However, there is a distinct difference between the two. Credit unions don't offer the option of becoming an investor like a P2P lender does.
As a borrower, your experience should be the same whether you opt for a P2P lender or credit union. You apply for the personal loan and, once approved, you pay it back in set instalments over an agreed period of time (usually between 1 to 5 years) along with interest and any fees.
If you're trying to choose between a P2P lender or a credit union, the best option is the one that gives you a better deal and fits better with your requirements.
Am I eligible for a peer to peer loan?
Like with any financial service, every peer to peer provider has their own conditions for taking out a loan.
As long as you meet the conditions of the P2P provider, you’ll be eligible for a loan. Most commonly, this means being over 18 years old and an Australian resident. Keep in mind if you have a poor credit rating you'll have to pay more in interest, as peer to peer lenders use a tier based pricing system and reserve their best interest rates for borrowers with excellent credit.
For instance, an unsecured personal loan from Plenti offers a variable rate starting at 7.39% p.a. to 8.59% p.a. (7.39% p.a. to 9.91% p.a. comparison rate*) for borrowers with excellent credit. The same loan for borrowers with good credit on that tiered system has a variable rate starting at 11.29% p.a. to 14.69% p.a. (12.97% p.a. to 16.41% p.a. comparison rate*).
Likewise, with SocietyOne, fixed rates on offer for an unsecured loan start at Tier 1 Credit at 6.95% p.a. to 12.99% p.a. (6.95% p.a. to 13.72% p.a. comparison rate*). The same rate for Tier 4 Credit sits at 16.99% p.a. to 22.49% p.a. (21.18% p.a. to 23.45% p.a. comparison rate*).
Is a peer to peer loan right for me?
If you're a creditworthy borrower looking for a loan under $35,000 for a term of 1 to 5 years, then a peer to peer loan could be for you. Peer to peer providers generally have smaller borrowing amounts and shorter timeframes compared to the major bank providers, whose loans can reach up to $100,000 and have longer loan terms.
It's also perfect for borrowers who don't have any security like a car or house to secure a loan with, as peer to peer loans are usually unsecured.
Plus, if you're on a strict budget, you'll love the fact that P2P loans generally have fixed interest rates that are locked in for the life of the loan.
If your requirements are different, compare the personal loan market here to find the right borrowing match for your needs.
What features should I look for in a P2P loan?
Just like any other personal loan, it's important to look for flexible features to make the loan work for you.
Here are some things to keep an eye out for:
Extra repayments facility: When you get some extra cash in your pocket, you'll be thankful if the P2P loan you signed up with allows you to make extra repayments. A little bit extra can go a long way in the long run, saving you interest over time. For instance, if you take out a $30,000 loan over 5 years with a 9% interest rate and make an extra repayment of $200 each month you will save $2,187 in interest and slash your personal loan by 1 year and 5 months.
Redraw facility: While paying off your personal loan early should be your ultimate goal, sometimes things happen that we can’t control. If you need some money for unexpected bills or a new family car down the track, the option of dipping into those extra repayments you've made could come in handy.
Flexible repayment frequency: Another feature that can help you pay down your loan sooner is setting up your repayments over a fortnightly cycle rather than monthly. With 26 fortnights in the year compared to 12 months, you’ll pay an extra month off every year of the life of the loan. For example, if your fortnightly repayments are $500, you will pay off $13,000 in a year, whereas monthly repayments of $1,000 would result in an annual repayment of $12,000.
Does a peer to peer provider sound like the right match for your borrowing needs? Some great options are compared at the top of the page to start your search. Alternatively, use our personal loan comparison tool to search Mozo's personal loan database that covers over 100 loans in the market today.