Is peer to peer lending in Canada the way to go? Here’s what to watch out for

What is peer to peer lending?

Peer to peer lending is a lot like using Kickstarter or GoFundMe, but you’re getting together a loan through registered lenders instead of donations.

The lender make-up can vary depending on the platform. Sometimes you’ll have a couple of lenders. Other times you’ll have droves.

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Peer to peer lenders in Canada

In Canada, peer to peer lending through an online platform is entirely legal.

Some of the most common platforms for peer to peer lending in Canada are:

• goPeer for unsecured personal loans
• /r/Borrow on Reddit for small loans with short-term repayment periods

Overall, the Canadian peer to peer lending marketplace is much smaller than in the United States. There are only a few peer to peer lending services available in-country.

PeerBerry is a good option for Canadians living abroad who are interested in peer to peer lending.

How to take out a peer to peer loan in Canada

Taking out a peer to peer loan in Canada starts with you and your internet browser.

Unlike traditional loans, you’ll be borrowing from groups of certified lenders through an online portal. Depending on the P2P service the lender make-up can be different, ranging from a group to one highly solvent individual.

The general process is:

1. Create an account, enter your info and apply for a loan
2. Wait for the platform to approve your account
3. Get assigned an interest rate based on your credit score
4. Wait to receive loan offers
5. Select offers and receive your loan
6. Enter the repayment phase

Once financed, you need to repay your loan with interest through your peer to peer lending platform of choice. If you get cold feet, you can usually cancel your peer to peer loan provided it’s less than 50% funded, but make sure to check the terms and conditions

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Types of peer to peer loans

Peer to peer loans closely follow standard loan classifications.

You can get personal loans (unsecured and secured), business loans, car loans and sometimes consolidate debt. Home improvements are another common type of peer to peer loan in Canada.

The most common metric for peer to peer loans is the raw amount being borrowed. For example, goPeer will loan up to $35,000 at interest rates starting at 8.99%. Although peer to peer lending services typically have a lower barrier of entry you still need to have a bit of a footprint.

For example, goPeer requires:

• A credit score of 600
• Annual income of at least $35,000
• A debt-to-income ratio of less than 35%
• At least 3-trades on your credit file

Meanwhile, marketplaces like r/borrow are significantly less regulated. Make sure to do your due diligence before digging in.

Pros and cons of peer to peer loans for borrowers

The biggest advantage for borrowers is ease of access. Let’s take a closer look:

Pros

• Quick and easy application process
• Competitive interest rates with traditional loans
• Lower barrier of entry for those with middling credit scores
• No fees for early repayment

Cons

• Additional fees from the peer to peer platform for matching you with lenders
• Won’t save you if you have bad credit
• Can be slower than pay day loans
• Difficult to sue due to waiving regulatory protections

The biggest risk for borrowers is that you may end up getting worse rates than a traditional lending model if you don’t do your research. Make sure to crunch the numbers by looking at loan rates with banks, and watch out for origination fees (i.e. a one-time payment made when you take out a loan).

Peer to peer lending: How it works for investors

Investors in peer to peer lending aim to get higher returns on their money when compared to using a savings account or other low-yield returns.

To get started:

1. Make an account on your peer to peer lending platform of choice
2. Deposit funds to lend
3. Select borrowers from an online marketplace (good peer to peer lenders include plenty of information about borrowers including credit scores, repayment history, etc)
4. Choose to invest in a given loan (you don’t have to cover the entire thing yourself)
5. Earn interest on every repayment made by a borrower

Pros and cons of peer to peer lending for investors

The biggest risk for investors is that you’re the one taking on almost all the financial risk, not a bank or deposit insurance corporation.

Pros

• Easy account creation and linking
• Requires a low minimum investment
• Higher interest rate return than other low-yield investments
• Allows for portfolio diversification

Cons

• Borrowers can default
• In the event of a default you need to rely on the peer to peer lending marketplace not a regulator
• Interest rate fluctuations can impact your returns
• Peer to peer lending platforms usually charge fees both during individual repayments and when the principal is repaid in full

Investors should keep in mind that peer to peer lending is a high-risk enterprise that may not be worth the stress of a defaulted payment.

Conclusion

Overall, peer to peer lending is a great extra option for Canadian borrowers and investors, but needs to be treated with caution.

If peer to peer lending doesn’t sound like your arena check out Money.ca’s coverage of the best personal loans or the best loans for small businesses.

Finally, check out our FAQs below to put to rest any lingering questions.

FAQs:

Is peer to peer lending a thing in Canada?

Peer to peer lending is a provincially regulated industry in Canada.

However, the peer to peer lending ecosystem in Canada is significantly smaller than elsewhere in the world. Canada only has a handful of peer to peer lending services. This is one of the reasons we mentioned PeerBerry as an international option for Canadians living abroad.

Is P2P a good investment?

The benefits of peer to peer lending vary depending on your goals.

For borrowers, P2P lending can allow for you to borrow money in situations where a bank might normally turn you down. Meanwhile, lenders can collect higher interest rates, but assume more risk in the event that a borrower defaults.

How much can you make with P2P lending?

To be clear, peer to peer lending is a higher risk option compared to traditional savings and bonds.

However, in some cases you can see higher returns than average. Peer to peer loans generally return between 5% and 9% per year.

It’s also important to remember that Canada’s market for peer to peer lending is less crowded than the US or Europe.

Is peer to peer lending safe?

In a regulatory sense peer to peer lending is absolutely safe from a legal standpoint.

This means that peer to peer lending services need to be approved by provincial and territorial securities commissions. In Ontario this would be the Ontario Securities Commission while Alberta has the Alberta Securities Commission.

Peer to peer lending services need to register as Exempt Market Dealers in their operating province or territory.

Sources

1. Canadian Securities Administrators: Check Before You Invest

2. goPeer: Home page

3. Reddit: r/borrow

4. PeerBerry: Home page

5. Alberta Securities Commission: Home page

6. Ontario Securities Commission: The exempt market