Peer to peer lending in South Africa: The ultimate guide
Think of peer to peer lending as going to the marketplace to find a loan or to lend people money for profit. There are no banks or middlemen involved. If you’re thinking of trying this non-traditional way of borrowing, keep reading to find out how you can safely link up with the best investors.
What is peer to peer (p2p) lending?
Let’s take a look at peer to peer lending features for a better answer to this question:
- Online financing. The p2p lending space is mostly found online. You have to visit a peer to peer website to borrow money or invest.
- No banks. Traditional financial institutions are not involved. As a result, borrowers usually visit p2p websites to find loans they can’t get at the bank. In turn, investors visit p2p websites to earn more interest on their money than what the bank offers.
- Peer to peer platforms. This is the middleman or online platform that matches borrowers and investors using an algorithm or a set of instructions that are followed by a computer program. The platform underwrites the loan by verifying the borrower’s information such as income, credit score, and other factors before making the match.
- Anonymous lending and borrowing. All payments and repayments are made through the platform, and there’s no direct contact between investors and borrowers.
- Loan fees and charges. Most peer lending companies have an initiation, arrangement, or origination fee that’s typically between 1% and 5% of the loan amount.
- Other features. Peer lending companies use internet technology that has low operational costs and which doesn’t need physical offices like banks. Therefore, p2p lending typically offers low rates for lenders and higher profits for investors. The peer lending companies profit by charging fees to the people using their service.
How safe is peer to peer lending?
Peer to peer lending is a little different from traditional online loan applications. You might want to know if borrowing or lending to strangers is safe. To keep things safe, you can perform the following security checks:
- Other security features include a URL that says https instead of http – the s stands for “secure” as well a closed padlock in the URL or address bar.
- Check for genuine online reviews from experts and individuals who have used the platform.
- If you’re an investor, find out if the platform offers a provision fund or buyback guarantee in case of late payment.
How does online peer to peer lending work for borrowers?
Generally, the process consists of four simple steps for borrowers:
- Fill out a questionnaire. You’ll have to provide accurate responses to questions about your income, financial history, and the details of the loan you want. This information will be used to carry out a soft credit check on you.
- Get a loan grade. Results from the soft credit check are used to calculate your loan grade, which tells investors how much of a risk you’re. If you’re not too much of a risk, more investors are likely to show interest, and that means your loan application will be approved.
- Provide necessary documents. These are sent through the p2p platform and are used to underwrite the loan. Documents include proof of income and employment as well as bank statements.
- Review and approval. Your information and documents are verified, and you may be asked to provide additional documentation. After approval, you sign the loan documents before the money is transferred directly into your bank account. The whole process can take anywhere between 24 hours and 1 week.
How does online peer to peer lending work for investors?
If you’re an investor, you can diversify your investments by taking these 4 simple steps:
- Open an online account. Choose a reputable peer lending company and open an account.
- Deposit your money. Your investment is broken up into smaller amounts which get distributed to several borrowers.
- Look at borrower profiles. These show you the loan grade the borrower has so you can decide whether to give them your funds or not.
- Collect monthly repayments. The borrower makes monthly payments which are distributed to you by the peer lending company.
Types of peer to peer loans available to South Africans
Various peer to peer loan products are available depending on the lending site:
- Unsecured personal loans. Borrowers are not required to provide collateral. Interest rates and loan amounts are based on your credit score. An unsecured personal loan can cover anything from debt consolidation to home renovations and holidays.
- Business loans. These can cover growth or expansion costs for small businesses. They can also improve cash flow, so business operations run more smoothly.
- Healthcare or medical loans. You can get a specialised loan that pays for your medical bills.
- Student loans. If you need to fund your education and you can’t find a suitable traditional lender, a peer to peer loan might be your only option.
- Secured loans. You can get a car loan or home loan that is secured against the asset itself. If you default, the property is typically sold to recover the funds you owe.
- Refinancing. You can replace your car or home loan with a peer to peer loan that has more optimal terms.
Advantages for borrowers
- Lower interest rates compared to banks;
- Easy online application;
- Fast and efficient electronic processing of information;
- You can still borrow without collateral;
- Credit score requirements are a bit more relaxed;
- Soft credit check that has no negative effect on your credit score;
- Access to a wide range of loan amounts; and
- Loan terms are flexible since they can go up to 5 years.
Disadvantages for borrowers
- If you have bad credit you’ll likely get a higher interest rate;
- There’s no guarantee that you’ll qualify for a peer to peer loan;
- The number of reputable peer lending companies available to help you is still limited.
Advantages for investors
- Higher returns on your investment than what you would get at the bank after keeping the money in a savings account;
- When you invest in peer to peer lending, you diversify your portfolio depending on your risk tolerance;
- Requirements for investors are less restrictive.
What are the risks involved for investors?
- You might deal with a high-risk borrower who is likely to default.
- The peer lending platform can collapse if they’re operating at a loss.
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