The technological advances that we have seen over the past decade have meant that new and exciting opportunities have opened up in the realm of finance. P2P loans are one of these opportunities, with this area of consumer finance expanding rapidly during the last few years. However, it can still be a little confusing when comparing P2P loans to traditional bank loans.
With that in mind, this article will discuss the difference between P2P loans and bank loans in detail. We’ll explore what each of these lending types is before highlighting which option is best for borrowers in the present day.
What is a P2P loan?
First thing’s first – what is a P2P loan? Put simply, peer-to-peer (P2P) loans are an innovative way to connect lenders and borrowers without the need for a financial intermediary. Instead, these loans are facilitated by lending platforms (such as Lendermarket) that help match both parties together and ensure a smooth flow of money.
As these lending platforms are often more accessible than current banking services, they offer an attractive alternative to the traditional way of lending and borrowing. Lenders can benefit from greater returns than they’d get from savings accounts and ISAs, which is even more critical now that interest rates are at rock bottom. At the other end of the spectrum, borrowers can receive funding much more quickly than with a retail bank – and with much less documentation required.
Overall, P2P lending offers an appealing alternative to traditional lending options, with benefits for both parties in the transaction. Due to this, the P2P lending market is expanding at a rapid rate – for example, Allied Market Research noted that this area of finance is expected to grow at a CAGR of 29.7% between 2020 and 2027. Although there will likely be roadblocks in the future involving rising interest rates and regulatory oversight, the outlook for P2P lending still looks exceptionally bright.
Bank Loans – How do they differ from P2P loans?
Now let’s turn our attention to bank loans. The main difference between bank loans and P2P loans is the party that lends the money. With traditional bank loans, the funding comes directly from the bank, so they assume all of the risk of default. With P2P loans, the funding comes from individual lenders, completely removing the need for a financial intermediary.
Another element to consider is collateral. Banks will usually offer unsecured personal loans, meaning there is no collateral backing up the loan. Due to this, personal loans tend to have higher interest rates than other loan types and can come with additional charges if you were to miss a payment. Banks will also offer secured loans for larger amounts (such as mortgages and car loans), which will be ‘secured’ against the underlying asset. If the borrower defaults, the bank can seize the asset to compensate for their loss.
Relating this to P2P loans, the key distinction to note is that most P2P loans are unsecured. Although these are riskier for the borrower, it makes the process more streamlined, as they are much faster to set up. Overall, both unsecured and secured loans come with pros and cons, so each type will be suited for specific situations.
P2P Loans vs Bank Loans – Which is better?
So, which is better – P2P loans or bank loans? There is much debate over this question, as both lending types offer benefits in certain situations. However, in terms of accessibility, P2P loans are the clear winner. As an online platform facilitates these loans, it simplifies the entire process and allows lenders to access funding much quicker than with a traditional retail bank. Furthermore, retail banks often require extensive documentation and credit checks before making a lending decision – with P2P loans, these checks are much less stringent.
Lenders and borrowers can benefit significantly from P2P loans, as they can often receive more attractive interest rates than with traditional banks. As P2P lending platforms are much ‘leaner’ than banks, they do not have to deal with the extensive overheads that banks have. This has a trickle-down effect to the P2P platform’s clients, enabling them to receive better rates.
Another advantage of P2P lending over bank loans is that it offers investors an innovative way of diversifying their investment portfolios. Traditional asset classes such as equities, real estate, and bonds will often dominate portfolios – yet the growth of P2P lending has offered a viable alternative to these assets. As P2P lending is considered ‘lower risk’ relative to equities and some other asset classes, it can offer a way for risk-averse investors to top up their portfolios with a passive income stream.
Having said all of that, it’s crucial to have a balanced discussion and consider the perks of bank loans. Some P2P lending platforms tend to charge high fees for facilitating the loan – and there may even be additional ‘hidden’ charges to look out for. Furthermore, certain jurisdictions do not regulate P2P activities as strictly as other lending types, which means that investor protection is lower. Finally, there is always the risk of financial loss with P2P lending – although this applies to all investments.
P2P Loans and Bank Loans – The Verdict
To summarise, P2P loans and bank loans offer a way for people to borrow money in the modern-day, with both having their advantages and disadvantages. With P2P loans, the entire process is much more streamlined and can be completed from the comfort of your own home. Bank loans are more rigid, requiring lenders to provide extensive documentation before receiving funds.
Overall, each loan type will appeal to certain people in certain situations, so there is no clear winner. With that said, the P2P lending market is growing rapidly and more and more lenders are using the market as an alternative to traditional asset classes. Due to this, P2P lending is here to stay and will continue to offer a different option for lenders and borrowers alike.