With technological advancements, the financial landscape has become more complex in Canada over the last few decades. If you wanted to obtain financing before, you would usually have to go to a traditional bank or borrow money from friends and family. Now, there are many other ways to obtain financing, one of which is peer-to-peer lending in Canada. Also known as P2P lending, this type of financing allows everyday people to act as lenders to other borrowers. This innovative system is possible through an online platform which connects buyers and sellers in a marketplace. Both borrowers and lenders benefit because each may not be in the market without peer-to-peer lending. Ready to learn more? Keep reading!
Table of contents
- What is peer-to-peer lending in Canada?
- Types of peer-to-peer lending
- Unsecured vs secured peer-to-peer lending
- Pros and cons of peer-to-peer lending
- Is peer-to-peer lending right for me?
- Invest in peer-to-peer lending in Canada
What is peer-to-peer lending in Canada?
Peer-to-peer lending is a type of financing where individuals lend money to other individuals. The system bypasses the traditional banking system. In other words, peer-to-peer lending allows individuals to obtain or provide financing when they otherwise may not have had access to the market.
In Canada, P2P lending platforms match borrowers with investors who are willing to fund their loans. Borrowers typically complete an online application and provide information about their financial history and creditworthiness, similar to a bank loan application. Investors can then choose to fund all or part of the loan. Once the loan is financed, the borrower makes repayments to the investors, with interest.
P2P lending is growing in popularity in Canada as it offers a more attractive alternative to traditional borrowing methods.
Types of peer-to-peer lending
What kind of financing is available on peer-to-peer lending platforms? Surprisingly, a lot! From home improvement to personal loans to mortgages, P2P lending has a lot to offer. Learn more about the different types below.
One of the most standard forms of financing is the personal loan. They are available on peer-to-peer lending platforms. Personal loans tend to have lower interest rates than credit cards, making them a good option for borrowers with good credit. However, personal loans tend to have shorter repayment terms, which makes monthly payments higher, but overall interest low.
Debt consolidation loans can be a good option for borrowers juggling multiple high-interest debts. By consolidating all of their debts into one loan with a lower interest rate, borrowers can save money on interest payments and pay off their debt more quickly. Keep in mind that debt consolidation loans can be difficult to qualify for if the borrower has a poor credit history. Debt consolidation products are available on peer-to-peer lending platforms in Canada.
Qualifying for a business loan can be a real challenge with a traditional bank or similar lender. This is especially true if it’s your first business venture. Fortunately, business loans are available on P2P lending platforms as an alternative. Business financing tends to have higher interest rates due to the additional risk. Although, they typically have longer repayment terms which are ideal for keeping your monthly payment low.
Auto loans are another option on peer-to-peer lending platforms for borrowers looking to finance a car purchase. Car loans typically have lower interest rates, but this is usually because the car serves as collateral on the loan.
Need help with the calculations for your peer-to-peer auto loan? Use our Car Loan Calculator.
On peer-to-peer lending platforms, you can find financing for home renovations or repairs as well. Home improvement loans typically have higher interest rates than personal loans but lower interest rates than credit cards. If something in your house needs fixing, turning to P2P lending may be a viable option.
Student loan refinancing
Student loan refinancing is when a borrower takes out a new loan with a lower interest rate to pay off their existing student debt. Refinancing student debt can help borrowers save money on interest, but it may also lengthen the repayment period. These types of loans are also available on peer-to-peer lending platforms.
Real estate lending
Real estate lending is when a borrower takes out a loan to purchase real property. In most cases, this type of financing is a mortgage. In other words, the financing is secured by the real estate purchased. Real estate loans can provide borrowers with the funds they need to purchase property, but collateral is often required, including on peer-to-peer lending platforms.
Need help with the calculations for your peer-to-peer mortgage? Use our Mortgage Calculator.
Unsecured vs secured peer-to-peer lending
There are two main categories of lending: secured and unsecured. The same applies to peer-to-peer lending in Canada.
With secured peer-to-peer lending, the borrower puts up some form of collateral, such as a house or car, as security for the loan. Collateral is any asset of significant value that can be repossessed in the event of default. If the borrower defaults on the loan, the lender can seize the collateral to recoup their losses. On the other hand, unsecured peer-to-peer lending does not require collateral, but it typically comes with higher interest rates to offset the additional risk for the lender.
All types of financing come with risks, including both unsecured and secured peer-to-peer lending. However, secured financing is often more ideal for the lender and unsecured financing is more ideal for the borrower. Putting up collateral is preferable for the lender because it protects the extended funds. But for the borrower, it’s better to have unsecured financing to protect their assets.
Pros and cons of peer-to-peer lending
|Pros of Peer-to-Peer Lending||Cons of Peer-to-Peer Lending|
|Loans can be obtained quickly and easily||There is a risk that borrowers will default on their loans, which could lead to losses for lenders|
|Interest rates are typically lower than those offered by traditional financial institutions when considering the same parameters||Lenders may not have access to their money or profits for long periods of time|
|There is more flexibility when it comes to repayment terms||The value of investments fluctuates with inflation and other economic principles, so there is always a risk that you will not get back the full amount you lent|
|Borrowers can improve their credit score by making timely, full repayments||Many peer-to-peer lending platforms charge fees, so it is important to compare the costs before investing|
|Lenders can earn higher returns than they would from traditional investments, such as savings accounts or bonds||Some people may feel uncomfortable lending and/or borrowing money to/from strangers|
|Peer-to-peer lending platforms offer a convenient way to lend and borrow money||The regulations surrounding peer-to-peer lending are still evolving, so there is some uncertainty about the long-term future of this type of lending|
|There is potential for social impact, as borrowers can use the loans to finance projects that benefit society as a whole, especially when they’ve been turned down by other lenders||Not all peer-to-peer lending platforms are created equal, so it is important to do your research before choosing one to invest in|
|Lenders are able to access a market they may not have been a part of otherwise||You may need to pay taxes on any returns you earn from peer-to-peer lending|
|You should only invest what you can afford to lose, as there is always a risk that you will not get your money back|
Is peer-to-peer lending right for me?
Before you dive into peer-to-peer lending, it’s important to understand the risks involved. While peer-to-peer lending can be a great way to earn extra money or finance your goals, there is always an element of risk.
Remember, the risks differ depending on whether you want to engage in peer-to-peer lending as a borrower or a lender. For borrowers, the risks are not as severe since you’re the one taking out money. However, if you default on the loan, the effects on your credit can be disastrous. It’s important that you assess your finances and whether taking out a loan makes good financial sense – don’t leave the decision entirely to the lenders! For lenders, the risk is greater, but this is true with any kind of institution that deals in financing. This is why interest exists. Although, as a lender, it’s up to you to allocate your money wisely and consider all the moving parts.
To determine if peer-to-peer lending is right for you, consider your financial position and goals. The decision to proceed with any kind of financing is always a personal one. If something doesn’t feel right, then it probably isn’t!
Is peer-to-peer lending safe?
Peer-to-peer lending is regulated by the Canadian Securities Administrators. All platforms must be registered to operate in Canada. This adds an extra layer of security for both borrowers and lenders. A major regulation includes segregated accounts for investor funds and disclosure statements. In addition, peer-to-peer lending often involves a contract which sets out terms and conditions to protect all parties involved.
Although, the safety of any particular lending arrangement depends on several factors, including the financial stability of the borrower and the lender, the terms of the loan, and the overall economic conditions. That said, peer-to-peer lending generally carries a higher risk than traditional banking arrangements. This is because peer-to-peer lenders are usually not subject to the same regulations as banks, and they often lack the financial resources to cover losses if borrowers default on their loans. Furthermore, peer-to-peer lending is still new compared to other banking institutions which have been around for many decades.
Peer-to-peer lending is a regulated market in Canada, but there are risks involved. As both a borrower and a lender, be sure to read the fine print before proceeding with any financing.
Is peer-to-peer lending legal in Canada?
In Canada, peer-to-peer lending is a relatively new phenomenon, but it is completely legal. While P2P lending is legal in Canada, there are some rules and regulations in place, as set out by the Canadian Securities Administrators. For example, P2P lending platforms must be registered with the appropriate regulatory body. In addition, all loans must be documented and must comply with applicable laws and regulations.
Although, just because something is legal, that doesn’t always mean it’s safe. As both a borrower and a lender, you must perform your due diligence before proceeding with any financial decisions.
What to consider when choosing peer-to-peer lenders
When it comes to choosing a peer-to-peer lender, there are a few key factors to keep in mind. Let’s explore what they are below.
- Interest rate. Naturally, the lower the interest rate, the better.
- Payment amount. Once you obtain a loan, you’ll be required to make monthly payments. Be sure that the amount comfortably fits into your budget.
- Term length. This is the length of time your loan will last. It can be tempting to extend the term as long as possible to keep payments lower, but then you’ll be carrying debt longer too. There is a clear trade-off here!
- Terms and conditions. In other words, the terms and conditions are the fine print of the loan. Be sure to read it as there can be hidden fees, sneaky prepayment terms, and more.
- Other due diligence. If any information is available about the lender, perform due diligence before getting involved with them.
Canada P2P lending platforms
There are a few Canadian peer-to-peer lending platforms. The idea is still relatively new in the market which is why there aren’t tons of options yet. However, they all operate in more or less the same way. Investors pool their money together and then lend it out to borrowers in increments, with the platform taking a small fee. The borrower pays back the loan with interest, and the investor receives their original investment plus interest. The two platforms that operate legally and legitimately in Canada are goPeer and Lending Loop.
goPeer is a relatively new platform, having launched in 2017. It offers loans of up to $25,000 with terms of up to 60 months. Investors can choose to invest in a specific project or loan, or they can choose to diversify their investments across multiple projects or loans. goPeer also allows investors to set up auto-investing so their money is automatically invested in new projects or loans that meet their criteria.
Lending Loop launched in 2014 and is currently the largest peer-to-peer lending platform in Canada. It offers loans of up to half a million with terms of up to 60 months. Lending Loop does not allow investors to choose specific projects or loans to invest in. Instead, investments are made through a fund and then distributed to borrowers based on creditworthiness and other factors. However, investors can choose to receive payments on a monthly or weekly basis. They can also choose to have their payments reinvested automatically.
Alternatives to peer-to-peer lending
If peer-to-peer lending doesn’t feel right for you, there are other ways to accomplish your financial goals, as listed below:
- Traditional financing from a bank or credit union
- Credit cards
- Lines of credit
- Home equity line of credit
- Borrow from friends and/or family
- Alternative online lenders
Invest in peer-to-peer lending in Canada
Interested in becoming a lender on a peer-to-peer platform in Canada? It is one of many creative strategies to earn a return on your investments while diversifying. The main advantage is it’s a way to earn interest on your lent funds without having to set up a brick-and-mortar institution. You can also give back to the Canadian community by supporting those who can repay their debts but can’t get financing from traditional institutions.
Peer-to-peer lending is relatively new in Canada, but it’s regulated by the same laws as other types of lending. That means there is protection in place for lenders, but there will always be a risk too. Before engaging, be sure to understand the risks involved so you’re not jeopardizing your money. When you’re ready to begin, choose a peer-to-peer lending platform you like and begin the process of investing.