Peer-to-peer (P2P) lending is an easy to grasp concept, as it refers to any loan that is provided directly by one party to another, without the involvement of financial institutions such as banks. In the UK, banks offer their customers very low rates of interest in return for keeping their money with them, but at the same time, they charge high rates of interest on their own loans. This naturally makes P2P loans a more attractive option when someone needs immediate money. They are an even more lucrative option for someone who has enough spare funds to become a P2P lender.
What is a P2P Platform?
Ideally, there should not be a third party involved, but unless you are lending from a friend, relative or family member, it would be difficult to find P2P lenders without a platform where you can search for options. As long as the platform is regulated by an Appointed Representative of a FCA regulated and authorised establishment, it should be a safe place to find legal, peer-to-peer lenders.
Should You Consider Becoming an Appointed Representative (AR)?
An Appointed Representative can be a group of people or even a single individual representing an FCA-authorised company. The authorised company that hires an AR for handling the specified business would then be considered as the Appointed Representative’s Principal. This Principal company would also be held liable by the FCA if any of the department’s mandatory compliance rules are broken by their Appointed Representative.
If you have any plans to become an Appointed Representative, or are considering your alternatives, pay a visit to the Northern Provident Group for professional guidance. They explain the various intricate pros and cons associated with launching a crowdfunding or P2P lending platform when you are under contract from an umbrella compliance company.
Is Crowdfunding the Same as Peer-to-Peer Lending?
Technically, crowdfunding is also a P2P transaction, because money is transferred to one party from another without the involvement of a bank or any other financial institution. The expectations of the lenders, the lenders themselves, and the causes behind crowdfunded projects are vastly different from those associated with P2P loans though, which is why the two must be classified separately.
Difference in Awareness
Every lender in a crowdfunded project already knows exactly to whom they are sending the money, and for what purposes it will be used. In P2P lending, the intention/purpose behind the loan may or may not be revealed by the loanee, but they are not obligated to do so. Things become even more anonymous if the loan amount is accumulated by pooling money together from multiple investors. In such cases, the investors may not even be aware of the borrower’s identity.
Crowdfunding is Not a Loan
For parties involved in crowdfunding as funders, it is a P2P equity investment, not a P2P loan. They could be given shares of the future company, or a percentage of profits made from the sales of a future product, but the funding parties do not expect their money to be returned to them with interest. They may even lose their money completely if the project fails or turns out to be dubious.
P2P loans, on the other hand, are just what the name suggests; they are loans from one party to another, which come with interest rates and tenures. Also, the borrower cannot just forfeit payment without legal consequences like they can in open-ended equity investments such as crowdfunded projects.
