There’s No Such Thing as “No Lender Fee”
P2P lending costs money for both borrowers and lenders. Because there's no such thing as a free lunch!
You can find out true costs of lending elsewhere on 4thWay and we'll show you where further below.l Firstly, here's how “free” lending actually costs you, starting with an example from another finance-related industry that all of you should be familiar with, namely travel money exchange:
Fee-free! 0% commission!
Apparently it costs us nothing to exchange currency for our holidays. “Fee-free exchanges with 0% commission!” they say.
Meanwhile they hide the real cost to you in the exchange rate. The real, “interbank” exchange rate is £1 to €1.20, but you get just €1.10 per pound. You pay no fee or commission, but for each £100 in currency you exchange, you're getting €10 less than you should. The bank or broker that did the exchange pockets money that way.
How it works in P2P lending
Many of the P2P lending companies are using the same techniques to convince individual lenders that their lending costs them nothing at all. (Indeed, some of P2P companies appear to believe their own PR so much that they really think they are free!)
There are three parties involved here: borrowers, lenders and the P2P lending company. Before you can work out who pays whom, you first need to think about why each of us pays.
Why does the borrower pay?
If you're the prospective borrower, you want cash! That's what you're paying for. You almost don't care how you get the money provided the interest rate, and terms and conditions, are acceptable.
Why does the lender pay?
Or you're a lender: you want to set up your own lending business so that you can earn interest, just like running your own little bank.
But you don't have the time, skills or technology to find borrowers yourself and then assess their creditworthiness, set up the repayments, chase late payers and take them to court if they move home without telling you.
So what you do is you outsource most of the operations of your little lending business to another company. There are over three score to choose from and they're called P2P lending companies.
Who pays whom
Since the borrower is paying, above all else, to borrow money, the borrower owes you, the lender, who is giving them that money. The borrower does not owe RateSetter, Landbay or Funding Circle, because they aren't usually lending any money. It's you, me and other individuals who are supplying borrowers with the product they want: cash. And the contract states that it is us lenders lending the money, not Funding Circle and the rest.
Us lenders, on the other hand, are paying to outsource most of our operations to these P2P businesses. So we – and we alone – pay the P2P lending companies.
How do lenders pay when there is no lending fee?
Here's an example.
P2P lending companies A, B and C all charge borrowers 10% APR.
They can't charge the borrowers fees on top of that 10%, because 10% is the market rate and the borrowers would then look elsewhere. So, if they want to charge a fee to the borrower, it has to be within that 10%.
So the borrowers all pay 10% APR, but the three companies take their own cut in different ways:
- P2P lending company A has a 1% borrower fee and a 1% lender fee.
- P2P lending company B charges a 2% borrower fee. Lenders pay no fee.
- P2P lending company C takes nothing from borrowers and charges the lender 2%.
It doesn't matter how you slice it, the borrower is paying 10% APR for the loan that you provided.
But you don't get all of the money. Whichever company you choose, you are getting 8% interest, which means the outsourcing commission you are paying is two percentage points off your earnings.
Le's put this another way: do you really think P2P lending company B is “free” for you? Do you think you're really getting a better deal there? Of course not.
The borrower pays you – and you pay the P2P lending company. No matter how the P2P lending company says it allocates its fees.
Let's put this in an extreme way just to ram it home: if borrowers are paying 10% interest and a P2P lending company takes a 9% “borrower fee” – leaving you 1% interest – do you really think you're paying nothing?
How much do “No lender fee” P2P lending companies really cost?
In fairness to the industry, it's hard to explain all that. Much easier to say “no lending fees”.
The one area that P2P lending companies are most slacking on is revealing the true costs to lenders.
4thWay does sometimes receive enough information to make a fair estimate of costs though. In our comparison tables, if you check the boxes next to individual comparison results and click on “Get more details” you can drill down to see costs.
All too often, those cost fields contain the words “Insufficient data” or “Restricted info”, but we'll continue to work to fill the gaps.
Why do costs matter?
You might now be thinking that the rate is all that matters. 8% is 8%, who cares about how much the costs?
But consider a company that charges borrowers 20% and passes you just 6%, while also giving you all the risk of the loan?
Compare that with a company that charges borrowers 8% while giving you 6%.
The second P2P lending company is probably doing safer loans and therefore it is giving you a far better return for your risks. That's why keeping an eye on costs is one extra check to see that you're not taking all the risk without the reward to go with it.
Lender fees aren't entirely irrelevant
In some circumstances, a lender fee can leave lenders worse off tax-wise. So there is a slight advantage to having no lender fees.
But much more important is the overall lending costs, namely:
borrower APRs (which includes fees charged to the borrower up front converted into an annual percentage) minus lending interest after fees.
*Commission and impartial research: our service is free to you. We already show dozens of P2P lending companies in our accurate comparison tables and we keep adding more as soon as they provide us with enough details. We receive compensation from landbay, RateSetter and other P2P lending companies not mentioned above when you click through from our website and open accounts with them. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.