The majority of people turn to their local bank when they need money. You can take out a bank loan to pay for a new car, a kitchen, or even an exotic holiday. But bank loans are not your only option these days. Peer to peer lending has become increasingly popular in recent years. Websites such as Zopa match borrowers with lenders, thus cutting out the ‘middle man’. Both types of lending have their pros and cons, so which one is right for you?
There are two types of bank loan: secured and unsecured.
- An unsecured loan is usually for smaller amounts. You borrow a fixed sum and pay it back over an agreed term, typically up to five years. Once you sign the loan agreement, interest is fixed.
- A secured loan is usually for a larger amount, which is why it is secured to an asset – often property, but not necessarily so. Secured loans are payable over a fixed term and at a fixed interest rate. The main difference between this and an unsecured loan is that you stand to lose your ‘asset’ if you fail to make repayments.
In many ways, peer to peer loans are not all that different from traditional loans. You can borrow a fixed sum of money over a fixed term, at a fixed rate of interest. However, the money comes from your peers, as opposed to a bank. Because P2P lenders have very few overheads, they can effectively undercut the banks with lower interest rates and better terms.
For the lender, it’s an even better deal. If you lend money through a P2P site, you will enjoy better rates of interest and tax-free interest if you move your earnings into an Innovative Finance ISA. For many investors, it’s a win-win situation.
P2P vs Bank Loans
In many ways, P2P loans trump traditional loans in that they offer better rates and they are more flexible. For example, if you borrow money from a P2P site, you are free to make overpayments or pay off the balance of your loan early, thus saving interest. In most cases, this isn’t possible with a secured or unsecured loan. Payments are fixed and although you can settle the loan early, you may have to pay a penalty in the form of interest.
All this is well and good, but not for people with bad credit. P2P lending sites are primarily for people with good credit. If you have bad credit, you won’t be eligible to borrow. In this instance, UK bad credit loans are your best option.
Bad credit lenders specialise in lending to people with adverse credit ratings. You will pay a higher rate of interest, but if you repay the loan without incident, it will help restore your credit rating.
Weigh up your options carefully before taking out a loan of any description – and make sure you can pay it back!