The short answer is: it varies. There are two parts to the cost of borrowing money from a peer to peer lender: the interest rate that you pay your lenders and the fee paid to the peer to peer platform for arranging the loan.
The interest rate + the arrangement fee = the total cost to borrow.
Let’s take these in turn. Firstly, the interest rate. Peer to peer lenders used to typically operate an auction model whereby your potential lenders bid against each other to offer you the lowest interest rate. Sounds great, and you the borrower should have got the greatest deal i.e. the lowest interest rate, right? Wrong. Platform operators would set minimum interest rates to guarantee that investors would receive a minimum return. Plus, unscrupulous investors would also bid a very high interest rate at the last minute to earn a phenomenal return – but push up the cost of borrowing. So sadly, the interest rate that a borrower would pay was often much higher than a bank would charge! Most peer to peer business lenders have moved away from an auction model to a fixed interest rate dependent on their perception of the risk of your business. However, the reality is that these are usually still much higher than a bank loan.
Secondly, the platform operators charge for marketing or arranging the loan. Most peer to peer business lenders charge a variable fee depending on how much you borrow, how long you borrow for and even depending on why you are borrowing. Then there may be “hidden” charges on top such as legal fees or bank charges. The arrangement fee is therefore difficult to calculate and often much higher than a bank arrangement fee.
So far its not really compelling to borrow from a peer to peer lender.
InvestMySchool offers two solutions to these problems. Firstly, YOU set the interest rate that your school is prepared to offer your lenders. It can be as low or as high as you like – but bear in mind that it needs to be sufficient to attract lenders! Secondly, we charge one single marketing fee of 3% of the funds raised – irrespective of how much your business borrows, how long the loan term is or how you are using the funds. Our “Quick Quote” tool combines the interest and the marketing fee to provide you with an APR so you know EXACTLY how much your loan will cost before you apply. Sounds good? Click here to find out more and apply for a loan now.