What is peer-to-peer lending

Having trouble applying for a loan from a bank or other financial institution? Then you may want to consider another option called peer-to-peer lending, also known as social lending and commonly abbreviated as P2PL.
 
There are several P2PL online platforms that connect people willing to loan out money for a fee to those who want to borrow money and they all operate in different ways. It's basically borrowing money from a stranger through an online system.
 
How does it work?
 
Justmoney's partner Lendico, for instance, connects investors and borrowers through its online platform. It claims that its loans are cheaper than the ones offered by banks, and that annual percentage rates on loans start from 7.87%. Investors, meanwhile can earn up to 26.17%.
 
Each project is analysed by Lendico's loans team and assigned to a specific interest class. It claims to be more efficient than banks. Borrowers pay low interest rates and investors get high interest returns, it claims in its video.
 
Lendico does require paperwork, information about why you need the money and how much you need. Once you have registered and imparted with this information you will receive a loan offer. If you are happy with the terms and conditions of the offer you can apply for the loan.
 
To approve the loan, Lendico asks for pay slips, bank statements going back three months as well as a copy of your ID and proof of residency, such as a utility bill.
 
Lendico adds that once your details are verified and your loan is completely funded they will send you an email with a link to your Lendico account where you can electronically sign your quote and pre-agreement as well as your loan agreement.
 
If an investor accepts your application the money will arrive in your bank account within a few days and you will pay back your loan in monthly instalments.
 
What fees do I pay?
 
If, for instance, you get a loan through Lendico it will charge you a fee between 0.50% and 7% (which never exceeds R1, 000). The loan platform explains that the level of the fee is calculated individually and depends on the terms of the loan as well as your credit score. The fee will be taken from your loan amount before it gets transferred to your bank account.
 
For example you get funded for a loan of R5, 000. Lendico will then charge you R25. Once you have signed the loan agreement Lendico will transfer R4, 975 into your bank account. For more about Lendico's fees, click here.
 
How easy is it to get credit?
 
But it may not be easier to get a loan in this way. Online loan marketplace Lendico explains on its website that since launching in South Africa on the 10^th April 2014, it has had over 5,000 applications from people who want to borrow money.
 
However, just because you are cutting out the banks doesn't mean that there aren't any checks and balances in place. Lendico adds that due to thorough underwriting only five percent of applications make it onto the platform.
 
What happens if I default on my loan repayments?
 
It's never wise to default on any loan even if it is obtained from a peer-to-peer lending platform. You will still get handed over and have your credit record tarnished. Lendico says it goes through the following steps to recover the money if you fail to pay:
 

• 1.Contacts the borrower via phone and SMS within 48 hours.
• 2.At five days: If unsuccessful, contacts per mail and post.
• 3.At 10 days it will issue the first default summons.
• 4.At 20 days there will be further attempts to contact the borrower and his/her immediate entourage.
• 5.At 30 days there will be a second attempt to debit your account.
• 6. At 40 days there will be a second default summons.
• 7.Day 55: A third default summons will be issued.
• 8.At 70 days Lendico says it will send a 'Last-Chance-Letter'.
• 9.At 90 Days Lendico terminates the loan contract and sells the loan to debt purchasing companies at market prices. Investors will then receive the remaining amount.

 
Is it safe?
 
P2PL is not a new concept and has been around since about 2000. It came about because there were many people that had become frustrated with their inability to get credit as banks tightened up their lending criteria.
 
But as with anything, there are risks involved particularly for the investors (lenders). P2P loans are generally not insured and there's no guarantee that the person you lend your money to will be good in keeping up repayments.
 
Some international sites in the past have been left to operate unregulated. In South Africa it appears that these companies are still unregulated.
 
According to an article published by Personal Finance they are not regulated because 'They don't qualify as banks, because they do not hold capital reserves or take deposits. They do not fall under the Collective Investment Schemes Control Act, because investors' funds are not pooled.
 
They do not fall under the Financial Services Board, because they are not financial services providers. And they are not required to register as credit providers under the National Credit Act (NCA), because they don't provide credit themselves'. For more, click here.
 
But other countries have got their financial regulatory bodies involved in this industry which has garnered so much interest and popularity, so it's surely only a matter of time before a South African financial regulatory body steps in to oversee the industry.
 
Then, of course, there's always the risk of the P2PL going bust and this is a risk for both investors and borrowers. Angelmoola.co.za and emoola.co.za, for example, are no longer trading.
 
Tips on choosing a P2PL site:

• 1.Ask the operator if it is regulated.
• 2.Only choose sites that are transparent with their fees and services.
• 3.If you are an investor find out how the P2PL goes about getting your money back should a borrower default on the loan you've awarded them.
• 4.If you are an investor find out what credit checks the P2PL does on potential borrowers.
• 5.If you are a borrower find out what fees you are likely to pay and if this is deducted from your loan or if you pay for this separately.
• 6.Find out how the website protects your personal information. If they don't have good systems in place, walk away.