Online lending services are relatively new, having been around for 10-15 years. Despite this fact, they have remained unpopular among borrowers, up until 2015. This is mostly due to the fact that most of the companies that have offered lending services in the past were very poorly regulated by the government. However, this has changed and they are now subjected to harsh laws that are designed to protect both borrowers, as well as the lenders themselves.
So, how safe are lending services?
Legal Safety Nets and Regulations
All online lenders that currently operate out of the United Kingdom are subjected to the same laws that banks must follow. As a result, online lending platforms are extremely safe, especially when considering that you, as a borrower can file a suit against them if they do not follow the agreement that you’ve signed.
Keep in mind that the companies behind these services are real-world registered businesses that have the same accountability as banks. Generally speaking, the only difference between traditional and online lending services is the medium through which they operate.
What Types of Online Lending Platforms Are There?
There are currently three main types of online lending services, each one designed to cater to different types of borrowers:
- P2P Lending Platforms – These websites only act as caretakers and supervisors, overseeing the transactions between lenders and borrowers. The platforms themselves do not offer any money but put lenders in contact with individuals looking to borrow money. For example, if you need to borrow £1,000, once you create an account on the platform and enter your request, you will be placed on a list until another user, a lender, will agree to give you the loan. The platform will only get a commission for its services and a portion of the interest that you have to pay;
- Online Lenders – Online lenders are essentially the online counterparts of traditional private ones. They offer the same services as banks and regular lenders and have the same financial structure. The only difference is that you can get a loan by submitting your request online and you get the money faster than if you were to go to a bank;
- Crowdfunding Platforms – Although these are not lending platforms in the traditional sense, they do allow individuals to request funding for business ideas. Through a platform account, users can create a portfolio for their financing request after which other individuals may contribute with fixed sums of money. These, however, require that you set a goal and the users that finance you have to receive something in return.
As an example, if you want to start a certain type of business, you can explain your idea to potential lenders, through your platform account. You also have to set a financial goal, such as £80,000. If other users consider that your idea is worth investing in, they can contribute to your goal with various amounts of money;
What Are the Risks That You Need to Be Aware Of?
There are only a few things that you should keep in mind when using online lending services. The most important one is that you must ensure that the company that you’re borrowing from is regulated. There are still a few scammers online that aim to steal your personal information.
Next, you have to keep in mind that most online lenders will have higher interest rates than banks. This is due to the fact that the majority of them do not check your credit rating before giving you a loan and usually ensure that you get the money in 1-2 days.
Lastly, secured online loans have much more strict terms and conditions, making them more dangerous if you are ever unable to repay the money on time.
Use Them Only If You Really Need Their Services
Overall, you will be made aware of all the risks of borrowing money from an online lending service when you take out a loan. These platforms are heavily regulated by the government and always play by the rules. However, you can still lose your home to them if you are not careful. Only use them if you absolutely need the money and doublecheck the agreements before signing them.