P2P lending drives rise in personal loan applications

If you’re considering taking out a personal loan your first thought is usually ‘which of the big banks are the best fit for me?’

 However, the growing popularity of a new type of lender has been paving the road for alternative ways to take out a personal loan.

An increasing number of borrowers are turning to P2P lenders for a personal loan.

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P2P lenders are bypassing traditional banks and facilitating a growing number of personal loans.

Figures released by Veda (Australia and New Zealand’s leading provider of consumer and commercial data and insights) in their Quarterly Consumer Credit Demand Index (December 2016 Quarter) have shown an increase of 12.4 percent in personal loan applications compared to their December 2015 Quarter.  

“Growth in personal loan applications is predominantly coming from products offered by new entrants in the personal lending space, beyond traditional credit card and auto finance markets,” says Angus Luffman, Veda’s general manager of consumer risk.

“These divergent movements suggest that consumers are being circumspect about taking on additional credit. Instead, they are taking advantage of the increased product options on offer to meet their needs.”

What are peer-to-peer lenders?

Peer-to-peer (P2P) lenders are online based platforms in which individuals or businesses can apply (and often bid) for a personal loan. They provide a direct link between applicants and investors, cutting out banks from the process. 

“[But] there is no clear definition of what a peer-to-peer lender is, but what is common to all is that they are digital players,” Luffman says. 

How does it work?

These P2P lenders work similarly to banks in that you can apply for a personal loan, however your rates are completely personalised based on your unique credit history. There is no fixed interest rate for all applicants.

Unlike traditional banks, investors also have the ability tell peer-to-peer lenders how much money the wish to invest, how long they want to lend the money, and the interest rate they would like. P2P lenders connect you to an investor and facilitate scheduled principal and interest repayments on your loan. 

“They are also very focused on giving the customer the best experience. They tend to use “risk-based pricing”, where borrowers with better credit scores pay lower rates of interest than borrowers with lower credit scores. They tend to offer only personal loans.

“We are seeing a lot of the growth coming from these players,” Luffman advises. 

What are the risks involved?

P2P lenders prioritise their borrowers and investors security, ensuring the processing of payments are secure and on time. To minimise the likelihood of late payments for their investors they vet all applicants and examine your credit history to determine if you are a reliable borrower.

P2P lenders also typically charge a higher interest rate than you may get from a typical personal loan. It is therefore critical before you apply, you calculate how much you will be expected to pay back. 

So which type of personal loan should I choose?

As with traditional banks, it is important to compare your options and examine what is the best rate for you. 

Investors with peer-to-peer lenders are not covered by the government’s guarantee on the first $250,000 on deposit with a bank or credit union. This can mean a higher interest rates set by lenders to compensate. P2P lenders also offer lower loan amounts than banks, usually up to $35,000 for a personal loan, so if you’re looking for a larger sum you may be better off with a bank. 

However, traditional banks tend to give you one fixed rate. This means that if you have great credit history you will be charged the same interest rate as someone who does not, which in itself could be a positive or negative based on your personal credit history. This can be an affordable alternative compared to taking a personal loan from a bank. 

Also, as it is an online marketplace platform the process of taking out a personal loan can be a lot faster and more convenient than the traditional method. 

Pros
  • Personalised rate based on your credit history
  • Affordable alternative – bypasses traditional bank fees and charges.
  • Faster and more convenient. 
Cons
  • Potential higher interest rates set by lenders.
  • Loan amount of $35,000 or less.

 

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RateCity provides a comprehensive personal loan calculator that we help will guide your decision. Whatever you choose it is clear that P2P lenders are an interesting and dynamic alternative to consider for your personal loan.

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Learn more about personal loans

What is a bad credit personal loan?

A bad credit personal loan is a personal loan designed for somebody with a bad credit history. This type of personal loan has higher interest rates than regular personal loans as well as higher fees.

Can you refinance a $5000 personal loan?

Much like home loans, many personal loans can be refinanced. This is where you replace your current personal loan with another personal loan, often from another lender and at a lower interest rate. Switching personal loans may let you enjoy more affordable repayments, or useful features and benefits.

If you have a $5000 personal loan as well as other debts, you may be able to use a debt consolidations personal loan to combine these debts into one, potentially saving you money and simplifying your repayments.

What is a personal loan?

A personal loan sits somewhere between a home loan and a credit card loan. Unlike with a credit card, you need to sign a formal contract to access a personal loan. However, the process is easier and faster than taking out a mortgage.

Loan sizes typically range from several hundred dollars to tens of thousands of dollars, while loan terms usually run from one to five years. Personal loans are generally used to consolidate debts, pay emergency bills or fund one-off expenses like holidays.

What do credit scores have to do with personal loan interest rates?

There is a strong link between credit scores and personal loan interest rates because many lenders use credit scores to help decide what interest rates to offer to potential borrowers.

If you have a higher credit score, lenders will probably classify you as a lower-risk borrower. That means they’ll be keen to win your business, so they may offer you a lower interest rate if you apply for a personal loan.

If you have a lower credit score, lenders will probably classify you as a higher-risk borrower. That means they might be concerned about you defaulting on the loan and costing them money. As a result, they might protect themselves by charging you a higher interest rate.

How much can you borrow with a bad credit personal loan?

Borrowers who take out bad credit personal loans don’t just pay higher interest rates than on regular personal loans, they also get loaned less money. Each lender has its own policies and loan limits, but you’ll find it hard to get approved for a bad credit personal loan above $50,000.

Should I get a fixed or variable personal loan?

Fixed personal loans keep your interest rate the same for the full loan term, while interest rates on variable personal loans may be raised or lowered during your loan term.

A fixed rate personal loan keeps your repayments consistent, which can help keep your budgeting consistent. You won't have to worry about higher repayments if your rates were to rise. However, on a fixed loan you’ll also potentially miss out on more affordable repayments if variable rates were to fall.

Can I get guaranteed approval for a bad credit personal loan?

Few, if any, lenders would be willing to give guaranteed approval for a bad credit personal loan. Borrowers with bad credit histories can have more complicated financial circumstances than other borrowers, so lenders will want time to study your application. 

It’s all about risk. When someone applies for a personal loan, the lender evaluates how likely that borrower would be to repay the money. Lenders are more willing to give personal loans to borrowers with good credit than bad credit because there’s a higher likelihood that the personal loan will be repaid. 

So a borrower with good credit is more likely to have a loan approved and to be approved faster, while a borrower with bad credit is less likely to have a loan approved and, if they are approved, may be approved slower.

What is the average interest rate on personal loans for single parents?

Like other types of personal loans, the average interest rate for personal loans for single parents changes regularly, as lenders add, remove, and vary their loan offers. The interest rate you’ll receive may depend on a range of different factors, including your loan amount, loan term, security, income, and credit score.

Can I get a bad credit personal loan with a guarantor?

Some lenders will consider personal loan applications from a borrower with bad credit if the borrower has a family member with good credit willing to guarantee the loan (a guarantor).

If the borrower fails to pay back their personal loan, it will be their guarantor’s responsibility to cover the repayments.

Where can I get a personal loan?

The Australian personal loans market contains dozens of lenders offering several hundred different products. Personal loans are available through a range of institutions, including:

There are three main ways to access personal loans. You can go through a comparison website, such as RateCity. You can use a finance broker. Or you can directly contact the lender.

Can unemployed single parents get personal loans?

It can be more difficult for unemployed borrowers to successfully apply for a personal loan. Most lenders require borrowers to have a regular income available to cover the cost of loan repayments.

If you’re self-employed, or if less than half of your income comes from Centrelink, you may not be eligible for some personal loan options. Consider contacting the lender before applying.

Can I get a self-employed personal loan with bad credit?

It may be much more difficult for a self-employed borrower to successfully apply for a personal loan if they also have bad credit. Many lenders already consider self-employed borrowers to be riskier than those in full-time employment, so some self-employed personal loans require borrowers to have excellent credit.

If you’re a self-employed borrower with a bad credit history, there may still be personal loan options available to you, such as securing your personal loan against a vehicle of equity in a property, though your interest rates may be higher than those of other borrowers. Consider contacting a lender before applying to discuss your options.

How long does it take to get a student personal loan?

Completing an online personal loan application can often take anywhere from 10 minutes to 1 hour. Depending on your lender, processing your personal loan application may take anywhere between 1 and 24 hours. If your personal loan application is approved, you may receive the money in your bank account the following business day, or, in some cases, the same day.

What is an unsecured bad credit personal loan?

A bad credit personal loan is ‘unsecured’ when the borrower doesn’t offer up an asset, such as a car or jewellery, as collateral or security. Lenders generally charge higher interest rates on unsecured loans than secured loans.