Your guide to peer-to-peer lending

If you’re looking for a competitive loan, consider the benefits peer-to-peer lending has to offer. P2P lenders in Singapore offer unique loans to small businesses and enterprises. Find out if a peer-to-peer loan is right for you and your business.

How peer to peer lending works

By lending their money, the investors gain access to an attractive fixed income asset class that can yield better returns than other investment options. Borrowers can also take advantage of lower rates that are based on their credit scores or business plans. All these are facilitated by a peer-to-peer lending platform that connects businesses or individuals looking to borrow with people looking to invest.

Peer-to-peer (P2P), or peer-to-company (P2C) providers do not match individual lenders directly with a borrower. Rather, they enable the lender to invest in a portfolio of consumer loans.

In other words, the P2P provider facilitates a platform where investors can finance a portfolio of loans and earn interest on what they lend, while borrowers are given an individual rate based on their credit score and other factors.

• Borrowers. To borrow, you submit an application to the P2P lender. The provider then evaluates your eligibility for a peer-to-peer loan by verifying your identity, credit history, employment or business, and financials. It will assess the risk of the loan and give you a personalised interest rate. After approval, your loan will be funded by one or several investors that choose to take you on. The P2P provider will usually deduct an application fee from the amount transferred.
• Investors. Potential investors review the available applications on the website and identify the borrowers they would like to fund, in part or in full. Investors will not be able to see any personal information from borrowers. Funds are then transferred to the borrower and their repayments will be made to the investor based on how much of the loan they funded.

Peer-to-peer lending in Singapore

If your business is in need of working capital, or you’re looking to diversify your investment portfolio, these are the main P2P lending platforms for you to consider:

• Funding Societies
• MoolahSense
• Capital Match
• CoAssets
• Minterest

Though small at present, the peer-to-peer industry is eyeing a big potential market. Its convenience and competitive interest rates enhance its appeal in comparison to mainstream financial institutions. This is also the first borrowing platform to open up the doors to smaller investors looking for higher and more secure returns.

It is unlikely that the P2P industry will replace banks altogether, but by harnessing technology and offering tiered interest rates to borrowers based on their credit scores, P2P providers can provide a convenient alternative to banks and other financial institutions.

Pros and cons of peer-to-peer loans

How to compare P2P loans

• Are they compliant? Check the credibility of the website or platform that you’re considering. They should have a credit license listed on the bottom of the page and check what banks or services they are affiliated with.
• What rates are you being offered? The rates offered by the peer-to-peer lender are usually lower than those offered by the banks, but you should also see whether they are fixed or variable.
• What fees are associated with your account? Take a look at the effective interest rate to see how much the loan is likely to cost you with the fees included, and remember to check whether you will need to pay any upfront fees to set up the loan.
• What are your loan terms and the amount you are borrowing? Some peer-to-peer lenders may not be able to offer you as high a loan amount as other banks or lenders, so check to see that you’ll be able to borrow what you need for as long as you need it.
• Have you researched the lender’s reputation? The lender’s reputability should also form part of your comparison. You might want to read independent customer reviews online, see how easy the lender is to be contacted, and how transparent they are with their fee and rate information.
• What are the requirements for an investor? As a borrower, you want to ensure the person you will be borrowing from is reliable and that the lender has strict guidelines in place to ensure no unscrupulous investors find their way into the lending network. Check out the lending requirements before you apply to be aware of the type of people you will be borrowing from.
• Are you eligible to become a borrower? While you want to check that you are eligible, you also want to ensure that the peer-to-peer network doesn’t have a too relaxed borrower eligibility criteria. Some overseas peer-to-peer networks who started lending to borrowers with bad credit failed due to a high number of defaulted loans, so you want to ensure the lender you go with doesn’t engage in high-risk borrowing behaviour

Frequently asked questions about P2P lending

• Who is lending me the money when I take out a P2P loan?

  The funds will come from an individual or group of investors. These investors will have signed up with the P2P lender you applied with and have chosen to lend you money (either by choosing your loan specifically or by you meeting the investor’s credit requirements). Remember that none of your personal information will be divulged during this process.

• How do I repay a P2P loan?

  A peer-to-peer personal loan is usually repaid via direct debit. The money is then transferred either directly to the investor or into an escrow.

• How do investors choose who to lend to?

  Investors either select a risk grade that they are willing to lend to – low risk, high risk, etc. – and then are matched automatically with borrowers or they choose loans individually. These loans can be funded in part or in full.

• Am I eligible to borrow?

  Eligibility criteria differ between lenders but you generally need to be over the age of 21, employed and earning over a certain amount each year (for example S$35,000 p.a.) and have good credit. For P2C SME loans, your business is generally required to be incorporated in Singapore and have been in operation for at least a year.

Picture: Shutterstock