Peer-to-peer lending is still a relatively new concept in Australia, though it is becoming increasingly popular. The most recent reports from ASIC and the Reserve bank suggest that though personal lending is on the decline, peer-to-peer lending has been growing at a rate of around 45-50% each year.

With more and more Australian’s switching from traditional banks to digital peer-to-peer lending platforms, you may be wondering how it all works and if it’s right for you. In this article, you’ll find all the information you need to make an informed decision.

What is peer-to-peer lending?

In simple terms, peer-to-peer lending (sometimes called ‘P2P’ or ‘marketplace lending’) is an online service that connects people who want to borrow money with people who have money to invest.

The process works like this:

1. A borrower fills out an application for a loan with an online peer-to-peer service.
2. The peer-to-peer service provider considers the borrower’s financial situation and offers the borrower an individualised interest rate. They also set the loan term and repayment amounts.
3. The peer-to-peer provider then posts the loan on their platform. They disclose the terms of the loan and how creditworthy the borrower is, but do not disclose any other personal information so that the borrower remains anonymous.
4. Investors can go onto the platform and lend money to whichever borrower they choose. Most will choose to spread their money over several loans to reduce the risk of default. They can choose to fund the full amount, or part of, each loan.
5. The peer-to-peer provider collects the repayments from the borrower and allocates the money to the investors.

For the borrower, the process is very similar to a normal loan application. For the investor, it’s like buying into a managed fund.

What is the interest rate on a peer-to-peer loan?

Peer-to-peer service providers tailor your interest rate based on your credit score. Like the banks, peer-to-peer lenders will publish general interest rates and comparison rates. At the time of writing this piece, the declared interest rates for peer-to-peer personal loans were around 6.5-7%.

However, it’s important to note that the interest rate they offer you will be individualised and likely be different to the one on their website, so we recommend you read the terms of your loan carefully before agreeing.

What are the fees on a peer-to-peer loan?

Is peer-to-peer lending safe?

The government guarantee on banks doesn’t apply to peer-to-peer providers, so it’s critical that you do your homework before you sign up with a peer-to-peer platform.

How do I apply for a peer-to-peer personal loan?

The application process is very similar to any other personal loan. You can fill out a form online. You will need to provide proof of your identity and financial information relating to your expenses and debts. Most peer-to-peer services also have minimum income requirements for borrowers, usually around $30K-$40K per year. You may struggle to get approval if you don’t meet their thresholds.

The peer-to-peer provider will run a credit check and assess how much you can afford to repay and how likely you are to default. On that basis, they will offer you a loan amount, interest rate and repayment plan. These may be different from what you requested on your application, so remember to consider your budget carefully before accepting.

Do I need collateral for a peer-to-peer loan?

Most peer-to-peer platforms offer unsecured personal loans and don’t require you to put up any assets as surety.

If you are using the loan to buy a car, you may be able to use the car as collateral and get a lower interest rate. Lenders consider secured loans as less risky because if you default, the lender can take possession of your car and sell it to recoup their costs.

Can I use guarantor or co-signer to get approval?

Most peer-to-peer platforms won’t allow you to list a guarantor or co-signer on your loan application. If your credit score and/or income is too low to get approval on your own, you may need to use a bank, credit union or bad credit lender.

If you are thinking of sharing a loan with someone, for example, with a partner, you cannot put both your names on the application. The person who is listed on the application is solely responsible for all repayments, and the amount they borrow may impact their ability to get more credit in the future.

What if I can’t make my repayments?

If you find yourself struggling to make repayments, contact your peer-to-peer provider straight away. They may be able to reduce your repayments, postpone the date your payment is due, or even extend the term of your loan so that you have more time to pay it off.

Remember that some of these measures can cost you more interest in the long run, so once you are financially back on your feet, you may want to talk to your provider about restoring your original repayment schedule or making catch up payments.

If you still are not able to pay your loan and you default, the lender can refer you to a debt collection agency or take you to court.