P2P loans vs payday loans
The cost of living is rising and more of us are likely to be looking for consumer finance 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 high-profile 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 frequently confused with payday loans – short term, low value personal loans which are designed to help people make ends meet while they wait for their next paycheck.
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There are plenty of differences between P2P loans and payday loans. The main difference is that P2P loans are funded by retail investors, while payday loans are generally funded by the payday lender directly.
Payday lenders tend to target lower-income borrowers by offering smaller loans of £100 or less, whereas 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 that P2P loans may not be available for borrowers with a history of bad credit. This means that default rates are typically lower with P2P loans, and the recoveries process is less aggressive.
But the most significant difference is the cost of the loans. P2P loans aim to provide affordable finance solutions to borrowers, so that the investors who fund the loans will have the best possible chance of receiving their capital and interest. Payday lenders make most of their money from penalties and the astronomically high interest rates which kick in once a loan has gone into default.
Take a look at the examples below to see how much a £1,000 loan would cost via a P2P loan versus a payday loan. We have used three representative examples for each type of lender, and all figures were correct at the time of publishing.
How much does it cost to take out a £1,000 loan with a P2P lender?
Elfin Market
Elfin Market offers personal financing through the Elfin Purse; an online credit card which is funded by P2P investors.
All withdrawals from the Elfin Purse are subject to a representative APR of 5.8 per cent. This means that a £1,000 loan taken from Elfin Market would ultimately cost £58.87.
Leap Lending
Leap Lending specialises in consumer loans of between £500 and £15,000, which can be paid back over a two year period with a representative APR of 15.48 per cent (including all fees).
A £1,000 loan repaid over two years would cost £157.76.
How much does it cost to take out a £1,000 loan with a payday lender?
Cashfloat
This popular payday lender offers same-day loans of between £300 and £2,500 with a representative APR of 611.74 per cent.
A £1,000 loan repaid over three months would cost £1,530.40 in interest alone.
Loanpig
Loanpig’s personal loans must be paid back within two to 12 months, and come with a maximum fixed APR of 292 per cent. A £1,000 loan repaid over three months would cost £521.72 in interest payments.
QuidMarket Loans
QuidMarket offers same day payment on short term loans of up to £1,500. The lender has capped its APR at 1,625.5 per cent, but currently advertises a representative APR of 1,296.5 per cent for loans which are repaid within three months. This means that a £1,000 loan would cost £514.58 in interest payments.
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