Modern problems require modern solutions and this is the case with the emerging peer-to-peer lending schemes in South Africa.
Whether financial institutions have wronged you in the past or you feel like you have not received the deal that you deserved, peer-to-peer lending is the alternative that you have been looking for.
Bypass the large financial corporate entirely and link up directly with a lender that is the most suited to your financial needs. This article will explain what peer-to-peer lending is and why it has become such a well-supported phenomenon in South Africa.
What is peer-to-peer lending all about?
Peer-to-peer lending cuts out the large banks and their fees entirely and allows the borrower and lender to interact directly.
The borrower lists their needs for a personal loan and an investor will decide whether they want to provide funding. The reasons for seeking funding can range from vehicle repairs, medical bills or even student loans.
Peer to peer lending is also referred to as P2P lending and is one of the more recent introduction to the South African credit market.
Since P2P lending is done entirely online there is minimal operating costs for the lender or, in this case, the lending platform. This makes loans cheaper because interest rates can be lowered.
In addition, P2P lending allows for borrowing large sums of cash and can come with flexible loan terms.
Lending criteria for peer to peer loans
The entire peer-to-peer financial model is developed around lowering the cost of borrowing money, thus, allowing higher rates of return for the investors who lend the money and lower interest rates for borrowers.
While it may be a cheaper alternative to corporate lending, it should not be compared with bad credit lending. The criteria to qualify for a peer-to-peer loan are a lot stricter than many banks. This also ensures that it is a very safe way to borrow and lend money.
Peer-to-peer loan providers conduct all business via an online platform listing potential borrowers and investors.
Because of the risk involved in investing money into an anonymous source, the provider needs to ensure that the borrowers are trustworthy or else investors will not show any interest in investing.
Thus providers have very strict criteria to build the level of trust needed to ensure a successful financial relationship between the lender and borrower.
What is all the fuss about?
The support for peer-to-peer lending is not limited to South African borrowers only but has taken the entire globe by storm.
Peer-to-peer lending offers a much simpler form of online finance that has a range of benefits for both the borrower and investor.
We're going to have a in-depth look at both the benefits as well as the drawbacks posed by peer-to-peer lending.
The benefits of peer-to-peer loans
- ONLINE applications – efficient and convenient
- LOWER rates and costs
- TOTAL anonymity
- UNSECURED and flexible
Online applications – efficient and convenient
As with most online loans, peer-to-peer lending allows for online loan applications. This means that you can apply from your home computer and allows you to secure funds faster if approved.
The provider’s platform has an algorithm which determines the most ideal match between borrowers and investors which is fully automated. This means that the turnaround time to obtain the loan can be within a few hours but may take up to 48 hours.
Lower rates & costs
The entire premise of peer-to-peer lending is built on providing lower interest rates and costs to borrowers. This essentially guarantees that you will receive a better loan offer from a peer-to-peer provider than other financial institutions.
Loan costs are kept to a bare minimum and only include a basic initiation fee of R150 plus ten percent of the loan value capped at R1 000 as stipulated by the National Credit Act. Unlike traditional lenders, there are no monthly service fees.
The peer-to-peer provider acts as an intermediary throughout the entire borrowing/investment process as all repayments are made via the provider’s platform.
This means that the investor and borrower never meet and remain anonymous throughout the entire process eliminating the risk of discrimination of any kind.
P2p platforms also enjoy high security and are dedicated to protecting the information of both investors and borrowers.
Unsecured & flexible
Peer-to-peer loans do not require any collateral to qualify. This means that your assets are safe if you are unable to meet repayments. Peer-to-peer platforms are also a lot more flexible than traditional lenders. Many even allow for overpayments or early settlement at no additional costs.
Drawbacks associated with peer-to-peer lending
As with any form of borrowing/investment, there are a few drawbacks that should be considered before making your final decision. These drawbacks include:
- STRICT lending criteria
- RISKY investment
Strict lending criteria
As stated earlier, peer-to-peer providers have no choice but to have strict lending criteria in place due to the level of trust they need to establish with both the borrower and investor.
This means that if you do not have a good credit record, it is unlikely that your loan application will be considered. But, the good news is that your application will not affect your credit score so you can always try again in the future.
Any form of investment involves risk but the risk involved with investing in a borrower through peer-to-peer lending is somewhat greater because you do not know who the individual is or what their history looks like.
This is where the trust in the provider comes in and investors have no choice but to believe that the provider has approved a trustworthy borrower. Overall, the benefits of peer-to-peer lending far outweigh the drawbacks, making it a very viable modern borrowing solution to South Africans.
As with any borrowing option, it is important to ensure that peer-to-peer lending is the right option for you and your finances. Set up a profile and give it a shot; you could be closer to getting the money you need than you think.