What is Peer-to-Peer Lending?
Peer-to-peer loans are loans provided by individuals and investors, as opposed to loans you obtain from your bank. People who have available funds can lend them to individuals and businesses through online services. The peer-to-peer service (typically a website or mobile app) acts as a central marketplace that connects borrowers and lenders, making the process relatively easy and efficient for everyone involved.
Benefits of Peer-to-Peer Lending
Note: Peer-to-peer loans are not always better than loans from traditional banks and credit unions, but they are often competitive.
Low interest rates: You can often borrow at relatively low-interest rates using peer-to-peer loans. Banks and credit unions must cover the operating costs of branch networks, other lines of business, and a large workforce. Peer-to-peer lending relies on better and more streamlined technology, making the cost structure more optimized than those of traditional lenders. Peer-to-peer lending is typically a better deal than using a credit card, but it’s always wise to compare rates. During that time, promotional rates should be considered, along with how quickly you’ll pay off your debts.
Origination fees: You may need to pay an origination fee ranging from 1% to 8% to finance your loan with a peer-to-peer lender. These fees depend on the total amount you are borrowing, so a $1,000 loan could incur a fee of $50, for example. These fees can be high compared to the cost of a personal loan from a bank. On the other hand, you might pay larger origination fees even for a second mortgage, and the personal loan process tends to be easier to navigate. Of course, you’ll incur additional fees for issues like late payments.
Fast and easy: Shopping for loans through traditional channels can be frustrating, and after applying, you may have to endure a long wait during the approval process. Peer-to-peer loans can alleviate some of this pain. The application process is usually straightforward, and you can often find out relatively quickly whether your loan is approved or not. The actual funding may take about a week (as investors choose whether to put their money into your loan). Decisions become increasingly faster, as online non-bank lenders fund loans as large investors.
Credit is important, but drawbacks are acceptable: In a world where lenders are hesitant to lend to anyone with negative marks on their credit history, peer-to-peer loans remain an attractive option. You may need good credit to get approved — a FICO score in the mid-sixties or higher is considered best — but peer-to-peer loans may offer you more options than are currently available in your area. For example, Upstart requires a minimum FICO or Vantage score of 620 to qualify for a loan, although individuals with limited credit history may also be eligible. The worse your credit situation, the more these loans will cost you (in the form of higher interest rates), but this is the case with most lenders.
Types of Loans
Peer-to-peer loans started as unsecured personal loans — you can borrow for any legal purpose and do not need to provide collateral to get approved for the loan.
Personal loans are still the most common among peer-to-peer loans, and they are also the most flexible. You can use the funds to consolidate debt, buy a new car, improve your home, or start a business. If you wish to borrow for higher education, check if the lender allows borrowing for that specific purpose. Student loans may be a better option for financing education anyway.
Offer
Peer-to-peer loans are now loans for specific purposes (such as small business loans or fertility treatments) along with loans that you can secure with collateral.
Notable Peer-to-Peer Lenders
The list of peer-to-peer options is continually expanding. Peer-to-peer loans have become popular with Prosper and LendingClub, which still offer fixed-rate loan options. If you’re considering borrowing through peer-to-peer loans, it might be worth getting a quote from either of these sources (in addition to checking offers from other sources, if you wish). Make sure to research any lender you’re considering and read reviews from trusted sources before applying for a loan. To get the loan, you’ll need to provide sensitive information like your Social Security number, and you don’t want to give this information to an identity thief.
How Does Peer-to-Peer Borrowing Work?
To borrow funds through a peer-to-peer loan, select a lender and start the application process. You’ll typically need to provide details about yourself, and the lender may inquire about your plans for using the funds. Most loans are personal loans, but some lenders may promote specialized packages to serve you better (such as loan packages for home improvement or debt consolidation, for example). The lender will examine your credit, and if you’re eligible for the service, investors can fund the loan.
With some peer-to-peer lenders, you may need to wait for a while to receive funding. The process may take several days or a few weeks. If your loan is funded, you will receive the funds electronically and repay the loan through automatic bank withdrawal.
Note: You typically repay over three to five years, but you can always pay off early without any penalty, which helps you save money on interest.
Credit Reports: Timely repayment of the loan contributes to building your credit. Most lenders report your activity to credit rating agencies, which should help you borrow on better terms in the future. However, if you’re prone to delays in payment or defaulting on the loan, your credit will be affected. It’s crucial to make payments a priority and communicate with the lender if you face financial difficulties.
Is Peer-to-Peer Borrowing Safe?
The answer to this question depends on what you mean by “safe,” but most major lenders are relatively consumer-friendly.
Data: Certified peer-to-peer lenders must protect your information with the same security as any other financial institution, and all communications should occur over an encrypted browsing session or application.
Privacy: Your identity should be kept confidential with individual lenders, but review the privacy policies carefully to understand what information investors will receive.
Rates: Interest rates are usually competitive with those you can find elsewhere. You will definitely pay less with peer-to-peer loans compared to consumer loans. Note: If you obtain a loan with a variable interest rate, be aware that rates can rise. If that happens, your payment will increase.
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Upstart. “What fees will I be charged?”
LendingClub. “How long does it take to get approved?”
Upstart. “What are the minimum credit score requirements to receive a loan?”
Source: https://www.thebalancemoney.com/how-peer-to-peer-loans-work-315730
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