Month: November 2019

Same day and emergency loans, whilst not as popular as they were in their heyday of 2011 (source: Google Trends), are still sought after by millions of people each year (source: Growing Power). There has been much talk about this kind of high-cost short term borrowing, not all of it positive, but the truth is that there are good points and bad points when it comes to these sorts of loans. Let’s examine both the good and the bad.

Pros:

Speed: As the name implies, same day loans can be applied for, approved and paid out into your account in the same day – and many sites actually boast that this process can be achieved within as little as 30 minutes. As the loans are typically for much smaller amounts, there is less red tape to wade through and the loan providers systems are set up to be as slick as possible. They have to be quick – as they wouldn’t be much good at meeting their customer’s needs if one of their ’emergency loans’ took a week to be paid out.

Availability: These types of loans are available to a large majority of borrowers – even those with less than perfect credit scores. The flipside of this is, of course, the relatively high cost of borrowing the money. But for customers with poor credit who probably wouldn’t qualify for a mainstream loan with a lower APR, these types of loans are ideal for solving short term financial problems.

Risk level: Same day loans are generally unsecured loans, meaning that you don’t have to risk any collateral such as a house or car to apply for the loan. Obviously it is still in the borrower’s best interests to repay the loan fully and on time as doing otherwise would significantly impact your chances of any further borrowing – but you won’t lose your home if you can’t pay.

Flexibility: Typically these sorts of loans can be tailored exactly to your needs. You define exactly how much you want to borrow and the length you need it for. Want exactly £1200 over 6 months? No problem

Cons:

The cost: There is really only one con, and that is the cost. As emergency loans are typically sought after by customers with bad credit histories, there is a significantly higher risk to the lender that a portion of the customers will not end up repaying their loan and default.

This risk to the lender means that they must, therefore, charge more interest on their loans overall to cover the losses from these defaulting customers. This results in the high APR rates that are associated with short term loans.

But if used correctly (i.e. to fund essential purchases or expenses in a time of emergency, and repay over a short period of time), these loans can be invaluable to certain borrowers.

Peer to peer lending (or P2P lending) has grown in popularity in the last 10 years. Sites such as Zopa and RateSetter have grown their user bases significantly as this more modern, albeit slightly esoteric, method of lending has become more mainstream. See below (source):

So if you are new to P2P lending – what do you need to know?

Remember – anything we publish on the site does not constitute financial advice. It is up to you to do your own independent research and if appropriate appoint your own FCA accredited financial advisor.

#1 What is P2P Lending?

Peer to peer lending is essentially what it sounds like. Rather than borrowing money from a bank, users seeking a loan will instead borrow money from other users who have money they want to lend out. The idea is that the prospective borrowers may be able to find a loan at a more competitive APR than they could otherwise get from a mainstream bank or lender, and likewise, the prospective lender gets a greater return on their money than if they were to invest it in a bank or building society.

All of this is facilitated bythe intermediary P2P website. There is a lot more complexity under the hood – but in a nutshell, that’s the deal.

#2 P2P Carries a Greater Level of Risk

If you were to invest your money in a bank, you are pretty much guaranteed to get that money back plus the interest.

If you instead invest that money via a P2P loan and your borrower were to default on their loan – you would lose the money you invested. There are good reasons the borrower would not default on the loan (the negative impact to their future finances being a primary example) and the P2P sites allow you to choose your accepted risk level – but you do need to be aware that walking away with nothing is a possible scenario for you.

#3 There are Fees Involved

The amount you stand to make isn’t necessarily governed simply by the interest rate you loan out at. There may also be fees charged by the P2P website that you need to take into account. Each site charges different fees, so it is important to do your research and look around for the right P2P site for you that charges fees at a level you deem acceptable.

#4 You Should Probably Diversify Your Risk

We mentioned earlier in this article that you could lose all of the money you invest if you choose to loan out via a P2P site. While that is true, it is unlikely that you would choose to fund a single borrowers loan. Instead, you would probably look to fund little chunks of several borrowers loans. This means that your risk is split among several different borrowers – so if one were to default, you would only lose the portion of money you had invested with that borrower – the rest of your investments would be unaffected.

The P2P sites make this process of funding little chunks of multiple loans very easy to do.

#5 You Are Probably in it For The Long-Haul

Largely, lending money via P2P sites locks that investment up for relatively long periods of time (e.g. 3 – 5 years).

You can understand why this would be – because if a borrower takes a loan of £10,000 over 5 years and you fund £2,000 of that loan – if you wanted to take your money out after 6 months, chances are the borrower won’t have repaid a sufficient amount yet to cover your withdrawal – so where would the P2P site find the extra cash to cover your withdrawal?

Certain services may allow you to transfer your money over to a different loan, but we’d suggest that you view P2P lending as a medium to long term investment.