I tell you now that I won’t have a definite answer in this post. Just a side note, calling these short-term, personal loans “peer-to-peer” is a bit misleading. Peer-to-peer for me means that one person gives money to the other person. But with these credits, for example on Mintos, a person gives money to the loan originator who gives the money to another person. Nothing wrong with this, just wanted to highlight. There are other peer-to-peer lenders, that are “real” peer-to-peer, like Envestio that lends your money directly to a project, without an intermediary.
But back to the topic: I had a closer look at 2 of the loan originators, who offer their loans on Mintos. I wanted to understand why borrowing from them can be attractive for some people.
They are operating in the UK, and this is their offer for a £900 credit for 12 months:
Hm. I had a the feeling that it is not the interest rate that attracts people to get credit from them – looks like that feeling was correct. Let’s have a look at a second one:
Fellow Hungarian readers, please grow up. Others, check on Google translate what “kuki” means in Hungarian. So, this is their offer for similar amount as above, but this is only short term, 30 days:
So on Peachy, you pay back almost double the amount for a 12 months loan of £900. On Kuki, although they offer loans for max 30 days, the annualized interest rate would be about 250%. At least I understand now how can these companies offer a buyback guarantee if their credits default.
I think that we can conclude that interest rate at which these companies offer their loans are very high and not competitive with typical bank interest rates. The point of peer-to-peer lending in my mind was that it eliminates the bank from the lender-bank-borrower chain, and once the chain has only the lender-bank elements, then one part of the banks’ margin can stay with the lender, the other part with the borrower. Therefore both parties are better off than having the bank in the middle. Here the setup is lender – Peachy/Kuki etc. – borrower, and borrower pays higher interest than he/she would at the bank. Why people still use these providers?
I think the solution is that these companies give credit for people with bad credit history, and they give it fast. If you need money instantly, the bank is not an option. They are slow, and they need tons of documents with your application. Providers specialized in short-term and personal loans can cut down the approval time to hours. People are probably willing to pay the extra interest if they need the money urgently. Because the flat TV is on sale only until tomorrow.