Created by: John Fitzsimons | 2 November 2018

Peer-to-peer loans vs borrowing from a bank

There are plenty of different reasons you might want to take out a personal loan. Perhaps you have some home improvements in mind, or you’re looking to purchase a new kitchen or car.

Finding the right deal is really important - the better the interest rate, the less the loan will cost you overall.

You might imagine that the best place to find a personal loan will be from your high street bank or building society. But broaden your search out to include peer-to-peer platforms and you may be able to secure an even better deal.

What is peer-to-peer?

Peer-to-peer platforms allow normal investors to lend their money directly to individual borrowers and businesses.

It’s much like the process of using a bank. If someone wants to save their money with a bank, they get paid a rate of interest in return. The bank then uses that money to help fund the bank’s loans, on which they charge a much higher rate of interest, with the bank pocketing the difference.

With a peer-to-peer site, the cut taken by the ‘middle man’ is all but removed, meaning investors get a better return and borrowers can get a loan at a lower rate of interest.

Are the rates better with a peer-to-peer platform?

Some of the best rates available today come from peer-to-peer platforms.

For example, if you are looking to borrow £5,000 over a five-year term, the lowest rate on offer comes from Zopa at 3.28% representative APR. Go to Nationwide and you’ll pay a rate of 3.5% for example.

Other sites worth a look include RateSetter, LendingWorks and QuidCycle.

Is borrowing through a peer-to-peer platform different to a bank?

The process of borrowing through a peer-to-peer platform is much the same as dealing with a bank. You’ll still have to go through a credit check for example, with the borrowers who have the best credit scores receiving the most competitive interest rates.

And if you miss payments, you will be hit with additional charges, as well as black marks on your credit record.

One big difference to bear in mind is where you can apply for the loan. If I want to take out a loan from my bank, I can pop into my local branch and do it in person. But with a peer-to-peer platform, everything is handled online.

Another important difference to consider are the fees involved. Unlike banks, peer-to-peer sites tend to charge borrowers an  ‘origination fee’ in order to cover organising the loan. So when you’re looking at how much the loan will cost you to pay off entirely, it’s important to include this fee in your calculations.

On the plus side though, many peer-to-peer platforms don’t charge you a fee if you pay the loan off in full ahead of schedule, which isn’t usually the case with banks. So if you want the added flexibility of being able to pay the loan off early, without it costing you extra to do so, then a peer-to-peer platform is well worth considering.

Is peer-to-peer borrowing safe?

Peer-to-peer is a relatively new section of the financial world, starting around the time of the financial crash a decade ago. It’s understandable if you might feel a little wary about using a peer-to-peer platform to find a loan.

That said, it is now regulated by the Financial Conduct Authority, the main financial regulator, so you are offered the same levels of protection as a borrower as if you took out a loan through a high street bank.

The sector also has a trade body, the Peer 2 Peer Finance Association, which has set out rules and operating principles that its members have to follow.