Business Technology

Luxury P2P lending: How does it work?

5 min read

18 September 2015

P2P lending is an effective form of alternative funding for SMEs, but how does luxury P2P lending work?

Peer-to-peer (P2P) lending has been around for over a decade and it has proved a hugely effective form of alternative funding for SMEs. 

This is because lenders are able to offer loans to people and businesses where banks and other lending institutions might not. For lenders, P2P boasts considerably better rates compared to the low returns from even the best savings accounts offered by high street banks. 

A report by Nesta in 2014 highlighted that the UK’s P2P market has grown quickly – up 288 per cent from 2013-2014. The rapid expansion of all forms of alternative funding has led to the industry becoming more mainstream; so much so, that the government has backed it with the launch of a new “Innovative Finance ISA”, which allows P2P investors to earn interest tax-free.

Anyone with a mortgage will be familiar with the principal of secured loans. But in the peer-to-peer market, lenders are now offering secured loans which allows people and businesses to unlock the value not of their house, but the luxury goods within it.

For instance, people and businesses can borrow against a wide range of high-value items including gold and silver, jewellery, luxury watches, diamonds, classic cars, art, antiques, luxury handbags, fine wine and musical instruments. 

Although it is common in the P2P market that there is no limit to the amount people can borrow (beyond 80 per cent of the value of the assets they are willing to put forward), loans can start from as low as £500.

Read more about the UK’s P2P market:

Those providing luxury asset lending have slightly different processes of valuation. Borrowers are asked to send in photographs and descriptions of their assets. In the case of a luxury watch, the valuer will want to know its make, what it is made out of, when it was made and whether it is for a man or a woman. 

Based on the valuation, prospective borrowers will typically receive a loan offer within three hours, although as is the nature of the luxury goods market, some items may require a second opinion which may take a couple of days.

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What’s the interest?

Dependent upon which P2P lender you use, borrowers can expect, for a £4,000 loan for instance, to pay between 2.5 per cent and 7 per cent interest monthly, with loan terms varying from six months plus. 

Regardless of the sum borrowed, set-up fees usually apply, which often covers valuation costs. For loans over £30,000, most lenders offer bespoke pricing. 

Pros and cons

The market for luxury asset loans can, however, be a confusing one with lots of players, not all of whom are transparent when it comes to costs, and there are often hidden fees which are not immediately made clear, as they’re buried in confusing small print. There are some providers, though, that do ensure that all costs are made clear from the get-go, so there are no nasty surprises further down the line.

With most financial services, there is a level of risk involved for the lender. But in most cases, as the loan is given against the asset in P2P lending, rather than an individual’s credit rating, the collateral carries no risk, so the loan is secure. 

In those rare circumstances when a borrower defaults on their debt, the asset is simply sold to compensate the lender, then any surplus proceeds from the sale (after auction fees and costs have been paid) are returned to the borrower. The benefit of this is a more secure environment for all parties involved.

Rito Haldar is co-founder of Unbolted and Adam Tavener is chairman of the Alternative Business Funding portal (ABF).