Peer-to-Peer Personal Loans

Peer-to-peer (P2P) lending is also known as marketplace lending. It is when loans are financed by multiple investors. It cuts out middlemen like banks, building societies and credit unions and takes you directly to the investor. P2P loans feature access to potentially lower rates and comparatively relaxed lending criteria. Some P2P lenders even offer personal loans.

What is a P2P loan?

A P2P loan is when you borrow money from individual investors. P2P lending sites match investors to borrowers.

The “lender” acts as a facilitator for the loan and operates the online platform where the applications are made and the matching takes place. It acts as the intermediary between the borrower and investor. The lender charges fees both from the borrower and the investor.

In return for lending money, the investors may get higher returns compared to what they get from other investments. Borrowers can get lower-interest loans.

Unlike traditional lenders, P2P lending has a more flexible lending criteria. This means that lenders are more open to funding loans for borrowers with less than perfect credit scores. They do this by offering interest rates personalised to the borrower and their risk profile. Excellent credit borrowers can receive lower rates and average credit borrowers will have access to finance but at a higher interest rate.

How does P2P lending work?

P2P or marketplace lending takes place on an online platform. Loan requests are made online, and these requests may be matched to investors.

While P2P lenders match borrowers to investors, they don’t match individual lenders to individual borrowers. Most often, the investor invests in a portfolio of consumer loans facilitated by the lender.

It is basically an investment or managed fund, with the lender acting as the fund manager. Investors can choose to invest in certain types of loans, for example, personal or business loans, or they are matched to loans that meet their criteria. For instance, loans within a certain interest rate range or loan term.

P2P lending offers personalised or risk-based loans. At the time P2P lending was introduced in Australia, this form of lending was a novelty. To remain competitive, traditional lenders have responded with their own risk-based loans. They are increasingly offering more competitive rates and innovative technology.

💲 If you’re looking to borrow, you’ll first have to submit an application to the lender. The lender will evaluate your eligibility by verifying your identity, credit history, employment and financial details.

Based on your risk profile, the lender will then give you a personalised interest rate. The lower the risk of lending, the better your rate will be.

After approval, your loan will be funded by one or several investors that choose to take you on. The P2P lender will usually deduct an application fee from the amount transferred.

💵 If you’re looking to invest, you may be able to choose how your money is used. You could choose to invest in a portfolio of loans or you could fund an individual loan.

You’ll be able to review applications on the website and identify the loans you’d like to fund. You can choose to provide partial or full funding. However, you will not be able to see the borrower’s personal information.

Once you’ve agreed to fund a loan, the money will be transferred to the borrower. Repayments will be made based on how much of the loan you’ve funded.

The ins and outs of P2P loans

What are the benefits and drawbacks of P2P loans?

Like all loans, P2P loans have benefits and drawbacks you need to consider.

For borrowers:

• You may be able to get a loan at a rate lower than those offered by traditional lenders.
• The application process is speedy and entirely online.

• Most lenders offer lower loan amounts than banks. It is usually up to $35,000 for a personal loan.
• The loan may come with fewer features than traditional personal loans.

For investors:

• A higher return on funds compared to other forms of investments.
• The opportunity to diversify your investments. You can also spread your funds over several loans to minimise your risks.

• There is no government-backed guarantee on the funds you invest.
• It can be a risky investment.

Which lenders offer P2P loans in Australia?

There are a number of P2P lenders in Australia. They offer their own unique product and rate. The table below is a quick guide to Australia’s P2P lending landscape:

How do I compare my options?

Whether you’re a lender or a borrower, there are a number of factors to keep in mind when comparing lenders. We’ve listed them below:

Which P2P loan is the best?

There isn’t a single loan that can be considered the “best” personal loan. What’s best for one borrower may not be the best for another. The best P2P loan for you will depend on your needs and circumstances. For instance, you may prioritise some aspects of the loan, such as cost, over other aspects, such as features. In instances where your score isn’t perfect, you’ll have to look for the best loan from the options available to you.

We’ve created a list of things to consider when looking for the best personal loan:

• Does this loan fit my budget? Look at the interest rate, but also the comparison rate to determine the true cost of the loan. If it fits comfortably within your budget, the loan may be worth considering. A loan with low rates and fees would be a good find.
• Do the loan features meet my needs? Consider whether the loan is secured or unsecured. Look whether the interest is fixed or variable. Are there any other additional features? Once you understand the features, you can determine whether the loan is suitable.
• Do the loan terms meet my requirements? Is the loan term too long or too short? Will a longer term make the loan more expensive? Will you have difficulty meeting repayments if the term is too short?
• Is the loan amount enough? Does the loan amount cover your needs or will you need a larger loan?
• Can I comfortably make my repayments? Is the repayment cycle aligned with your pay cheque? Will you be left out of pocket or scrambling to make your repayments?
• Does the loan require an asset as security? Do you have an asset to offer as security? Are you comfortable with the risk of a secured loan? Would you like lower rates by offering security? If you don’t have an asset to offer, you should consider an unsecured loan.

Should I apply for a P2P loan with bad credit?

Before you apply for a loan, you need to know what your credit score is. You can get a free credit check with Finder. This will give you an idea of where you stand on the credit scale. You could have a few negative marks, but there may be a chance you’ll fall into one of the lender’s brackets.

That said, you need to thoroughly research your lenders. Some lenders offer loans based on a “best”, “good” and “average” scale. Other lenders have tiers ranging from 1 to 5. This can range from exceptional to excellent, very good, good and average.

Lenders ultimately rely on information supplied by credit reporting agencies. In Australia, there are 3 main agencies: Experian, Equifax Australia and illion. The scores can range from 0 to 1,000 for Experian and illion, and from 0 to 1,200 for Equifax Australia. Because of the difference in scales, your score could differ between credit score providers. Lenders like SocietyOne base their calculations on scores provided by Experian. If you know where you stand on Experian’s scale, and if you fall into one of the lender’s tiers, you could be eligible even if you have some negative listings.

Checking your score before applying can help you determine whether you’re eligible. If you don’t fall into the lender’s eligibility categories, you shouldn’t apply. All credit applications are listed on your credit report. If a lender rejects you, this can affect your credit score, which will make it harder to apply for credit in the future.

If you have bad credit and need a personal loan, you should work towards improving your score. Your credit score is updated every month. What you do to improve it now will have an impact in the long run. Some of the steps you can take to improve your credit score include the following:

• Paying all your bills on time
• Paying off your debt
• Lowering your credit card limit

By demonstrating that you’re willing to engage in positive credit behaviours, you can increase the lender’s confidence in you.

Why compare personal loans with Finder?

Addicted to details. We know taking out a personal loan is something you'll be hooked up with for a while. That's why we put hours into research for this guide (and still do at least once a month)

Rates obsessed. Lenders come in all shapes and sizes, that's why we don't just track the big banks, but all the digi folk too. Pretty much everyone but your parents to be honest.

Cash for whatever you need. Lending rates verified from 180+ products day and night. Whether you're buying a car, rennovating your home or heck just ready to let loose with the spending - we got you.

Frequently asked questions

• 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 have signed up to invest with the P2P lender you applied to. They have chosen to lend you money as an investment. The investors will either choose to fund your loan specifically or your application is chosen because it meets their credit requirements. None of your personal information will be available during this process.

• How do I repay a P2P loan?

  A P2P personal loan is usually repaid via direct debit. The money is then transferred either directly to the investor or into an account they can withdraw from.

• How do investors choose who to lend to?

  Investors select a risk grade they are willing to lend to. They are then matched automatically with borrowers in this grade or they choose loans individually. These loans can be funded in part or in full.

• Am I eligible to borrow?

  The eligibility criteria differs between lenders. You generally need to be over the age of 18, employed and earning over a stipulated amount each year. Your credit score will also be taken into consideration.

• Can I take out a P2P business loan?

  Yes, there are P2P business loans available. You can check the table above for details on which lenders offer business loans.

• Do P2P loans come with fixed or variable interest rates?

  Most P2P lenders in Australia offer fixed rate loans. There are some lenders who also offer variable interest rates.

• How can I apply for a P2P loan?

  Applications are online on the lender's website. You can go directly to its site by clicking the "go to site" on the table next to the lender.

• Are P2P loans the same as crowdfunding?

  The premise of P2P loans is similar to crowdfunding, but with a crucial difference. When someone crowdfunds a cause (like say, textbooks for a struggling university student), they don't expect anything in return. When an investor funds a P2P loan, they do it with the expectation of making a return on their investment.

Written by

Elizabeth Barry

Lead Editor

Elizabeth Barry was the lead editor for Finder. She has over 10 years' experience writing about a range of topics with a focus on personal finance. You’ll find her writing and commentary in a range of publications and media including Seven News, the ABC, MSN, the Irish Times and Singapore Business Review. See full bio

Elizabeth's expertise

Elizabeth has written 211 Finder guides across topics including:

• Banking
• Personal finance
• Investing