There are several types of consumer credit available. They are granted, for example, by banks and various financial institutions. When comparing an appropriate financing option, you may come across consumer loans, instant loans, flexible loans and also peer loans. Multiple names, but virtually all just different ways to borrow money.
So how do these loans differ from one another and how does it affect the borrower in practice? It’s a good idea to approach the differences by thinking about who is actually borrowing the money. The origin of the money you borrow also influences the interest rate of the loan you are applying for.
The consumer credit company borrows the funds itself, the peer loan company acts as a marketplace
In addition to their own funds, financial institutions that grant consumer credit lend money to private individuals on loans borrowed from outside investors. As a result, the consumer credit company makes its own profit from the difference between the money it borrows and the interest rates on the loans it grants to consumers, as well as the drawdown and billing fees associated with the loans. Consumer credit, quick fixes, and flexible loans all do this.
For peer-to-peer loans, the model is slightly different. The peer-to-peer loan company acts as a direct marketplace between lenders and borrowers. Thus, the interest is received directly by the investor and the peer-to-peer loan company does not take a separate share between the interest rates of the funds borrowed by the investors and the loans granted. As a result, the result of a peer-to-peer loan company consists mainly of withdrawal and billing fees.
Borrowers’ interest rates fall as investments increase
The peer-to-peer loan market grows and becomes more efficient, the interest rates on peer-to-peer loans will remain roughly at the level where private financial institutions can borrow funds from investors. This means slightly lower interest rates for borrowers.
So far, peer-to-peer loans are a relatively new option for consumers and interest rates are changing with the growth of the peer-to-peer loan market. On the other hand, interest rates also fluctuate daily depending on the amount of money available and the number of loan applications. Therefore, it is always a good idea for a price-conscious borrower to apply for a peer-to-peer loan in order to know the current interest rate and compare it with other loan options.
How does a peer-to-peer loan work in practice?
Applying for a peer-to-peer loan works the same as applying for any consumer loan. The applicant fills in the online application and verifies their income. The peer-to-peer loan company reviews the information and creditworthiness. Based on this, the application is rated and transferred to the marketplace of the peer-to-peer loan company where investors bid for the loan. Once the loan has accumulated suitable investments, it is transferred to the borrower and the debt relationship is formed directly between the borrower and the investors.
The difference with traditional consumer credit applications is reflected in the speed of the loan. The market situation determines the interest rate and the time at which the loan application is completed, ie how quickly the money can be transferred to the borrower. Most peer-to-peer investing is done through investment vending machines, loans are usually settled quickly, but depending on the market situation, it can take minutes to days.
Once the loan has been granted and transferred to the borrower, the peer loan is no different from a regular consumer loan. The peer-to-peer loan company acts as an agent for investors, sends invoices and pays payments to investors. Likewise, a peer-to-peer loan company manages any debt collection efforts through its partners.
Whenever you apply for a loan, it is important to remember to compare several options. As part of loan comparisons, it is a good idea to apply for a peer-to-peer loan so that you can find out the current market interest rates.