The cost of living is rising and more of us will likely be looking for consumer credit solutions in the near future.
There are a number of options available to consumer borrowers, from overdraft facilities to credit cards. But for some borrowers, a personal loan may be the most appropriate choice.
Despite the departure of leading consumer lenders such as Zopa and Lending Works, there are still a number of peer-to-peer lending platforms offering personal loans to borrowers. However, P2P loans are often confused with payday loans – short-term, low-value personal loans that are designed to help people make ends meet while they wait for their next paycheck.
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There are many differences between P2P loans and payday loans. The main difference is that P2P loans are funded by retail investors, while payday loans are usually funded directly by the payday lender.
Payday lenders tend to target low-income borrowers by offering smaller loans of £100 or less, while P2P consumer lenders offer larger loans with longer repayment terms. P2P lenders also tend to perform more rigorous credit checks than payday lenders, which means P2P loans may not be available to borrowers with bad credit histories. This means that default rates are generally lower with P2P loans and the collection process is less aggressive.
But the most significant difference is the cost of loans. P2P lending aims to provide affordable financing solutions to borrowers, so that investors funding the loans have the best chance of receiving their principal and interest. Payday lenders make most of their money from the astronomical penalties and interest rates that kick in once a loan goes into default.
Take a look at the examples below to see how much a £1,000 loan through a P2P loan would cost compared to a payday loan. We used three representative examples for each type of lender, and all figures were correct at the time of publication.
How much does it cost to take out a £1000 loan from a P2P lender?
Elfin Market offers personal financing through Elfin Purse; an online credit card funded by P2P investors.
All withdrawals from the Elfin Purse are subject to a representative APR of 5.8%. This means that a loan of £1,000 from Elfin Market would ultimately cost £58.87.
The loan jump
Leap Lending specializes in consumer loans between £500 and £15,000, which can be repaid over a two-year period with a representative APR of 15.48% (all fees included).
A £1,000 loan paid off over two years would cost £157.76.
How much does it cost to take out a £1000 loan from a payday lender?
This popular payday lender offers same day loans between £300 and £2,500 with a representative APR of 611.74%.
A loan of £1,000 repaid over three months would cost £1,530.40 in interest alone.
Loanpig personal loans are due for repayment within two to 12 months and come with a maximum fixed APR of 292%. A £1,000 loan repaid over three months would cost £521.72 in interest payments.
QuidMarket offers same-day payment for short-term loans up to £1,500. The lender has capped its APR at 1,625.5%, but currently advertises a representative APR of 1,296.5% for loans repaid within three months. This means that a £1,000 loan would cost £514.58 in interest payments.
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