Key learning points
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Peer-to-peer lending involves borrowing money from a group of people or a company rather than from a traditional lender such as a bank or credit union.
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A peer-to-peer platform connects you with a group of investors who may be willing to finance your loan.
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Peer-to-peer lenders typically have lower credit requirements; some approve applicants with a fair credit score as low as 600.
Peer-to-peer lending, or P2P lending, connects borrowers to a network of investors. Unlike a traditional lender, the investors you are connected to (a group of people (peers) or a company) decide whether you want to finance your loan.
Although the same factors are used to evaluate your loan application as a traditional loan, the eligibility requirements are often not as strict.
Key takeaway
Before taking out a peer-to-peer loan, weigh the pros versus the cons to see if it makes sense based on your financial circumstances.
What is peer-to-peer lending?
Peer-to-peer lending brings investors – individuals and businesses – directly to people who need money. Traditional personal loans come from institutions such as banks, credit unions or online lenders. With peer-to-peer lending, you borrow money from a person or company that invests in your loan.
How does peer-to-peer lending work?
Most peer-to-peer loans are arranged through online lending platforms. The entire process takes place online and usually has a short turnaround time. This is how it works:
- Prequalification: See if you qualify for a peer-to-peer loan through the site’s prequalification process, which gives you an estimate of what your potential loan terms and annual percentage rate (APR) – your interest rate, plus any fees – could be if you applies.
- Application: If you qualify and the terms offered are competitive, you can apply on the lender’s website. Please note that the lender will perform a hard credit check, which will temporarily lower your credit score.
- Approval: A lender usually needs 24 hours to approve your application.
- Financing: Once approved, multiple investors will review your loan. Depending on how much you want to borrow, they will pay part (or all) of the amount you requested.
- Electronic Funds Transfer: Once your loan has enough investors, you will receive your money, usually via electronic transfer. Depending on the lender, your money can be deposited within one business day.
- Loan Payments: Make fixed monthly payments that are paid out to all investors in your loan based on your repayment terms.
Key takeaway
Prequalify with as many lenders as possible when looking for peer-to-peer lending to find the best deal.
What fees do peer-to-peer lenders charge?
The most common fee you’ll encounter with peer-to-peer lenders is an origination fee, usually up to eight percent of your loan amount. These fees are charged in advance or deducted from your total loan amount. You may also be charged a late payment fee if you miss a payment.
Before signing up, check the lender’s terms and conditions page to see if you’ll be charged any other fees, including hidden fees. These can add up quickly and detract from the value of your loan.
Key takeaway
Before taking out a P2P loan, read the terms and conditions to understand the costs.
How does it work if I want to borrow money?
To borrow money through a peer-to-peer lender, create an online account which you can then use to view the different loan options and terms. You can also track your loan repayment through your account.
Like any investment, there are risks associated with P2P lending, and you can have as much or as little control over the process as you want. Platforms can help you decide on individual loans, while others distribute your money automatically.
What can I use a peer-to-peer loan for?
Most peer-to-peer loans are unsecured personal loans. Like personal loans from financial institutions, you can use them for almost any legal purpose, such as:
- Car purchase
- Debt consolidation
- Fertility treatment
- Renovation
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Major expenses such as medical bills or a car repair
- Moving costs
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Small business loans for starting or growing a business.
Like personal loans, most P2P lenders have limitations. For example, most do not allow you to use your money for gambling and prohibit using the money for stock investing, any form of pure financial investing or direct selling. Some lenders also prohibit you from using the money for post-secondary education expenses, such as tuition or room and board.
Where can you get a P2P loan?
There are many online marketplaces that offer P2P lending. Here are some popular platforms to jump-start your search:
- Financing circle: Funding Circle connects borrowers looking for small business loans with a network of investors. It offers term loans up to $500,000 and a line of credit up to $250,000 to qualified applicants.
- Kiva: Kiva connects borrowers who need money to finance their small businesses with a network of lenders who are not profit-driven. Instead of using your credit score to underwrite the loan, Kiva requires you to get a certain number of people to send you money through the platform. Once the threshold is reached, your loan becomes available for public financing.
- Bloom: Founded in 2005, Prosper was the first peer-to-peer lender in the United States. It offers personal loans to qualified borrowers ranging from $2,000 to $50,000; Origination fees range from 1 percent to 7.99 percent. To qualify, you must have a minimum FICO score of 600.
What are the pros and cons of peer-to-peer lending?
If you’re considering taking out a personal loan through a peer-to-peer marketplace, know the pros and cons first.
Plus points
- Fair credit allowed: Some peer-to-peer marketplaces allow borrowers to have a credit score as low as 600. This is good news if you don’t have great credit (or much credit at all) and can’t find a loan through other means.
- Fast financing process: As with all online lenders, you complete your application in a few minutes and if you’re approved, you can expect to receive your money within a few days. Some banks and credit unions may take much longer to fund your loan or may require in-person applications.
Cons
- You may be charged more: Peer-to-peer lenders typically charge origination fees ranging from 1 percent to 8 percent of your loan amount. Not everyone charges these fees, but you will want to check all fees before applying.
- You may have a higher interest rate: Depending on the market, you may get a higher interest rate than with traditional lenders. Your credit score also determines your interest rate: the lower your score, the higher your rate. Shop around for the best peer-to-peer lending rates before applying.
What is the difference between peer-to-peer lending and bank lending?
The main difference between peer-to-peer lending and bank lending is who funds them. If the money comes from an online lender made up of an individual or a group of investors, it is a peer-to-peer lending. If the money comes from an established financial institution, such as a credit union or bank, it is a traditional bank loan.
Many banks offer some of the lowest rates available, which is a benefit to borrowers with excellent credit. If you already have an account with a traditional bank, it may offer member benefits and benefits, such as higher autopay discounts, for those who take out one of its personal loan products.
Those with a thin or not-so-great credit history may want to look elsewhere for a personal loan. Banks typically have stricter qualification requirements and slower funding times, making it difficult to qualify and get money quickly.
The loan amounts and repayment terms of bank loans and peer-to-peer lending are similar, but if you need to borrow a smaller amount to hold on, peer-to-peer lending is more likely to offer loans with lower dollar amounts.
| Peer-to-peer lending | bank loans |
|---|---|
| Funds from individuals or groups of people | Funds from financial institutions |
| Flexible options for those with less credit history | Stricter qualifications |
| Online app | A personal application may be required |
Frequently Asked Questions
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In terms of security, peer-to-peer platforms protect your personal and financial information just like a traditional bank or online lender would. However, they are not exactly traditional banks or online lenders, which can lead to fear of borrowing from them. . That said, investors take the most risk. If borrowers do not repay their loans and default, investors are likely not to get their money back.
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Before using a peer-to-peer lending platform, research whether the lender is legitimate to avoid being scammed. The FTC recommends checking to see if a lender is registered for business in your state. You can also read reviews from review websites such as Trustpilot.
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Maximum loan amounts vary depending on the peer-to-peer lender you apply to. Some P2P lenders, such as Prosper, allow qualified applicants to borrow up to $50,000, while others offer loans up to $500,000. That said, the exact amount you can borrow depends on several factors, such as your income, credit score and how much debt you have.
it comes down to
Although peer-to-peer lenders offer personal loans like other financial institutions, they are not quite the same. With these types of loans you go directly to the financiers. It is an investor who finances your loan, not a bank.
If you’re interested in P2P lending, the first step is to research the lenders you want to work with and pre-qualify. If you are offered competitive terms for your financial situation and you sign up, you can expect to receive the money within a few business days.
