P2P Loans vs. Payday Loans

The cost of living is rising and more of us will likely be looking for consumer finance solutions in the near future.

Various options are available to consumer borrowers, from bank overdrafts to credit cards. But for some borrowers, a personal loan may be the best choice.

Despite the departure of high-profile consumer lenders like Zopa and Lending Works, there are still a number of peer-to-peer lending platforms that offer personal loans to borrowers. However, P2P loans are often confused with payday loans — short-term, low-value personal loans 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 generally funded directly by the payday lender.

Payday lenders tend to target lower-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 conduct more stringent credit checks than payday lenders, meaning P2P lending may not be available to borrowers with a history of bad credit. This means that P2P lending default rates are typically lower and the recovery process is less aggressive.

But the most significant difference is the cost of the loans. P2P lending aims to provide borrowers with affordable financing solutions so that the investors who fund the loans have the best possible chance of preserving their principal and interest. Payday lenders make most of their money from penalties and the astronomically high interest rates that kick in once a loan defaults.

Check out the examples below to see how much a $1,000 loan would cost through a P2P loan compared to a payday loan. We used three representative examples for each type of lender and all numbers were correct at the time of publication.

How much does it cost to borrow $1,000 from a P2P lender?

elf market

Elfin Market offers personal financing through the Elfin wallet; an online credit card funded by P2P investors.

All withdrawals from the Elfin wallet are subject to a representative APR of 5.8 percent. This means that a £1,000 loan taken out by Elfin Market would end up costing £58.87.

leap lending

Leap Lending specializes in consumer loans between £500 and £15,000, repayable over a two year period at a representative APR of 15.48% (inclusive of all fees).

A £1,000 loan repaid over two years would cost £157.76.

How much does it cost to borrow $1,000 on a payday loan?

cash float

This popular payday lender offers same day loans between £300 and £2,500 at a representative APR of 611.74 percent.

A £1,000 loan repaid over three months would cost £1,530.40 in interest alone.

rental pig

Loanpig’s personal loans have periods of two to 12 months to repay and have a maximum fixed annual interest rate of 292 percent. A £1,000 loan repaid over three months would cost £521.72 in interest payments.

QuidMarket Loan

QuidMarket offers same-day payments for short-term loans up to £1,500. The lender has capped its APR at 1,625.5 percent, but currently advertises a representative APR of 1,296.5 percent for loans repaid within three months. This means that a loan of £1,000 would cost £514.58 in interest payments.

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