Unlike conventional consumer loans provided by banks and other institutional lenders, peer to peer loans are private loans provided directly from private borrowers to private lenders in exchange for interest. A peer to peer broker connects lenders and borrowers, typically via an online platform.
Since its introduction as a personal loans solution, peer to peer lending has been extended to businesses, with peer to peer platforms offering business loans in addition to personal loans. Increasingly, institutional lenders have begun to lend via peer to peer platforms as well as their conventional channels. What sets peer to peer loans apart is that you borrow from and pay interest directly to lenders, without a conventional bank or broker acting as a middle-man. Additionally, the term typically applies to loans from online platforms which act as loan brokers.
With conventional loans, the bank pockets the difference between the very low interest which they pay their account holders and other investors, and the high interest rates which they charge borrowers for loans. In this interest margin business, banks act as loan brokers, but they choose the terms and conditions for both borrowers and lenders – within legal limitations.
With P2P loans, on the other hand, borrowers enter into a direct contract with lenders, thus bypassing banks and other institutional lenders. By doing this, both borrowers and lenders can potentially benefit from better conditions.
How do peer to peer platforms work?
Peer to peer platforms connect borrowers with lenders via online platforms. Typically, multiple lenders invest in the same loan. This practice is referred to as crowdlending.
Peer to peer platforms handle risk and credit checks, as well as the administration involved in preparing and securing private loan contracts between borrowers and lenders. They manage the secure transfer of the loan from the lender to the borrower (via a third-party escrow account at a bank) and handle the collection of loan repayments. In exchange for these services, they charge administrative fees – typically from both lenders and borrowers. The lender receives the full amount of interest paid by the borrower, providing borrowers make their loan repayments as agreed.
How do I apply for a loan from a P2P loans platform?
The process of applying for a loan from a Swiss peer to peer loan platform is similar to that of applying for a loan from a bank or other conventional lender. You must meet certain essential criteria. These are typically the same criteria which you must meet in order to get loans from Swiss banks, meaning you must be resident in Switzerland, have a regular income and good creditworthiness. The exact terms and conditions vary depending on the platform you use.
Depending on how good your creditworthiness is, as per the credit check, your loan application will be placed in one of several risk categories. The better your creditworthiness is, the lower the interest rate you will get and the less interest you will have to pay on your loan. The poorer your creditworthiness is, the higher the interest rate for your loan will be and the more interest you will have to pay to lenders.
Unlike conventional lenders, some P2P loan platforms let you enter the maximum interest rate which you are willing to pay when you apply for loans. However, these platforms too conduct credit checks and set interest rates based on your creditworthiness. The peer to peer loan auction system, in which lenders bid on loans by offering lower interest rates than other lenders – with the lenders offering the lowest interest rate gaining the right to provide the loan – is not yet widely offered by Swiss peer to peer loan platforms.
After you successfully pass the credit check, your loan application is listed on the platform for investors to review. Information visible to investors includes the risk category, the interest rate, the loan’s designated purpose, the loan term and the loan amount. Depending on the platform, additional information such as your civil status, age, occupation, income, rent, number of children, nationality and residence permit may also be available to investors.
Which P2P loan platforms operate in Switzerland?
A number of peer to peer loan platforms now operate in Switzerland, offering personal loans, business loans and even student loans.
What are the advantages of P2P loans?
Borrowers benefit from the competition which peer to peer lending platforms bring to the market, as P2P loans are often more affordable than personal loans from conventional lenders. Over the long term, this competition may drive down interest rates, benefiting consumers.
Although most Swiss peer to peer loan providers do not lend money themselves and therefore are not required to register as lenders, many follow the guidelines set forth by the Swiss consumer credit law – the law which governs Swiss consumer loans. This means that you may benefit from the lower interest rates of private loans while still benefiting from many of the rights which you get with consumer loans (such as early repayment without penalties).
What are the disadvantages of peer to peer loans?
Depending on the platform you use, you may have to wait longer until you receive a peer to peer loan than you would if you successfully applied for a personal loan from a bank or other institutional lender. This is a possible disadvantage of peer to peer loans because borrowers often need to access money as quickly as possible. Another disadvantage is that, if no lenders are interested in financing your loan, you will not receive the loan at all, in spite of your application being approved. The largest Swiss peer to peer platforms, however, guarantee that waiting periods are not longer than those applicable to loans from conventional lenders.
Although loans from peer to peer loan platforms often have lower interest rates than conventional person loans, it is important to take all costs into consideration when calculating the actual cost of a loan. For example, peer to peer loan platforms charge administrative fees. The effective annual interest rate should account for administrative fees, and this is the rate which you should use as reference. Additionally, some peer to peer loan platforms require you to take out payment protection insurance, which adds to the monthly cost of the loan.
Peer to peer loans provide an alternative to conventional personal loans. However, it is important to study the exact terms and conditions of each P2P loan platform before applying for loans. Performing a personal loan comparison or a business loan comparison which accounts for both conventional and peer to peer loans is recommended.
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