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Australians’ use of debt finance is ranked one of the highest in the world, with our use of home loans, car loans and personal loans ever increasing as the cost of living heads north. As borrowers seek affordable finance options, an emerging finance trend we’ve seen over the past couple of years has been the rise of peer-to-peer (P2P) lending.

P2P lending removes the need for an orthodox lender, such as a bank, and instead connects investors and borrowers via an intermediary lending marketplace. Some common P2P platforms include La Trobe Financial, RateSetter, SocietyOne and Marketlend.

Investors include both individuals and companies who invest their money with a company such as those listed above and generate profits by charging a fee (and interest) to both lenders and borrowers.

So how does it actually work?

Well, a borrower’s eligibility for a loan is assessed by the provider and based on the borrower’s credit and employment history. This will determine their individual interest rate. Borrowers then repay their loans through the lending platform, which in turn passes the repayments onto the investors.

P2P lending is capturing the existing marketplace for personal finance solutions with high yields being the main drawcard for investors, but there are also unique benefits for borrowers:

Competitive interest rates

Borrowers can typically secure interest rates lower than those offered by traditional banks. This gives borrowers the opportunity to access funds at a competitive interest rate which means they reduce their interest costs over the life of the loan. While interest rates are tailored to each borrower individually, P2P rates can range from around 7% to 27% based on the applicant’s credit history and serviceability potential.

Efficient (and online) application process

P2P lending offers a speedy alternative to navigating the paperwork and procedural headaches the banks encompass. As everything is performed online, the entire transaction and application process is much faster than traditional lending methods.

Lower fees

The cost savings that can be generated by facilitating a lending transaction entirely online lowers the fees and charges associated with accessing finance. The absence of physical banks, managers and shareholders minimises the fees charged to users of P2P lending.

However, there are numerous things to check before investing in or borrowing from a P2P provider. You should check that the organisation is correctly registered and licensed, and you should also review their policies and their terms and conditions to ensure you are not signing up to something that you’ll later regret.

P2P lending is making waves in the finance industry and is a trend we’re likely to see more until now. For savvy borrowers looking for low interest rates, an efficient application process and fewer fees, P2P lending can be an innovative and cost-effective option for many Australians.

Have you invested in peer to peer lending? You should have it on the list of things to consider if you want to do business investment in Australia.

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