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Peer-to-peer lending vs bank loans: Where are the lowest interest rates?

While banks have been tightening their purse strings and placing increasingly draconian restrictions on lending eligibility criteria, a new breed of personal loan provider has been filling the void. Peer-to-peer personal loans are provided by ordinary individuals, via a peer-to-peer lending platform, who simply want a higher rate of return than the interest rates being offered by most high street banks. One of your primary concerns when applying for any type of credit will be assessing how much it will cost you, but you should also consider how straight forward the application process is and how flexible the loan is in terms of overpayments and early settlements. Both bank loans and peer-to-peer personal loans charge interest and fees, but where can you find the real bargains?

There is no doubt that finding affordable, unsecured credit can be incredibly difficult these days. However, the choice between a peer-to-peer personal loan and a traditional bank loan is a relatively new one, and making the right choice for your own situation requires knowledge of how both work.

Bank Loans

Bank loans have been the traditional way to secure a lump sum for many years now. Banks are profit-making institutions that have to account for their actions to shareholders and government authorities. Firstly, this can complicate the application process, and in some cases, delay the release of funds for several weeks. Secondly, the need to make significant profits can lead to relatively high rates of interest and fees being charged.

When arrangement fees, settlement charges and early repayment penalties are factored in, the cost of borrowing this way can be significantly higher than the alternatives.

Peer-to-Peer Personal Loans

When taking out a peer-to-peer personal loan you are borrowing directly from other people rather than a bank, and therefore you will need to have a very good credit history and be able to demonstrate that you can afford to meet your monthly repayments.

When you apply for a bank loan, being approved in principle is often only the first step of many towards getting your hands on the cash you need. The whole process can often take several weeks to finalise. However, most peer-to-peer lending platforms can complete the entire process - from the initial application to the release of funds - within a few days.

By connecting lenders and borrowers directly and cutting out the bank in the middle, peer-to-peer lending platforms are also often able to offer much lower rates of interest, particularly on smaller loans below £7,500. Whilst it is possible to secure an APR of 5 or 6 percent on peer-to-peer lending platforms, you may be charged more than this if your credit history and current financial circumstances suggest you represent an elevated risk to lenders. However, until you actually complete the application process and receive your personalised quote, you won’t know with any degree of accuracy how much your loan could end up costing you.

Peer-to-peer lending platforms typically also offer much more flexibility in terms of overpayments and early settlements, with most platforms not charging any additional fees to do so. With the quick and easy application process, affordable rates of interest and additional flexibility, it’s no surprise that more and more people are turning their backs on traditional sources of consumer finance and embracing alternative finance options.

ABOUT THE AUTHOR:

Nick Harding is Founder and Chief Executive Officer at Lending Works. Lending works is a peer-to-peer lender that matches thoroughly underwritten personal loan borrowers to shrewd lenders so both receive a much better deal. Lending Works is the first peer-to-peer lending company to have insurance that protects lenders against borrower defaults and fraud. For more information, please visit – www.lendingworks.co.uk or follow Nick Harding on Google+

This was posted in Bdaily's Members' News section by Nick Harding .