The sharing economy is booming. Whether it’s your car, your home, or your time, there are many apps and websites where you can directly market your items and services, or borrow those of your peers — for a fee. The same is true for your money.
Is it something you want to try? Here’s everything you need to know about how peer lending works.
What is peer lending?
Traditionally, if you needed a loan, you would head to a bank or financial institution to see how much money it would let you borrow. In the P2P lending system, loans are given online directly by individuals, investors, or businesses.
Each lender will have its own stipulations on the amount you can borrow and the reason for the loan, and you’ll need to go through an application process. Companies and services such as LendingClub and Prosper match borrowers with lenders to help streamline the process.
How peer lending works
Peer lending works by applying for a loan on websites such as LendingClub. Investors on those platforms then offer to lend you money under certain repayment terms.
The platform assesses your risk level using factors such as your credit rating. This level will determine your interest rate and loan options, often in a matter of minutes.
The investors simultaneously present their loan offers for you to choose. Once you pick your loan, the lender will send funds directly to your bank account. You then make monthly payments to repay the loan under the agreed-upon timeline and interest rate.
The loan might be funded in a day or a few weeks. Typically, repayment periods can go up to five years depending on the loan amount, and there’s often no penalty if you repay early, which will save you from paying interest over time.
Types of P2P loans
When the P2P industry started, lenders offered unsecured personal loans, which allows you to borrow money for any legal reason without having to provide collateral. You can use the money to buy a new car, make improvements to your home, consolidate credit card debt, or fund a new business venture.
Unsecured personal loans still are the most common P2P loan type, but there are other options now, such as business loans, secured loans with collateral, and student loans.
How to apply for a P2P loan
The application process for a P2P transaction takes place online and usually can be completed in minutes. The process will vary depending on each lender’s requirements for different types of loans.
To borrow money, you typically need to be at least 18 years old, have a verifiable Social Security number and bank account, and provide personal information such as your birthdate and address. For certain types of loans, like the ones below, you likely will be asked to provide other data.
Personal loans: A lender could consider your credit score, debt-to-income ratio, employment status, salary, and other financial elements to determine your eligibility and interest rates. The P2P lender might also want to know the reason you need the loan and ask for additional information such as your outstanding debt, mortgage payments, and education history.
Business loans: A lender could ask you to provide information on factors such as the time you’ve been in business, your personal and business credit scores, revenues and profits, tax returns, balance sheets, and your debt service coverage ratio, which is a measure of business cash flow.
Some investors also issue loans to fund mortgages, education costs, and car purchases, which could require other background information.
Pros of P2P lending
Peer-to-peer lending has grown in popularity over the years, thanks to a number of benefits it has over loans from traditional institutions. Here are some of the best features.
Lower interest rates: The P2P marketplace is competitive, so you typically can secure interest rates that are lower than those at a bank or other financial institution. Also, the transaction happens between two individuals, so all the interest goes directly to the investor, who has less overhead, so they can charge lower rates.
Simple and fast process: The application process typically takes a matter of minutes, and you’re presented with options just as fast. Then the funds can be deposited directly into your account in days.
Poor credit doesn’t disqualify you: Although P2P lenders take your credit score into consideration and generally require your FICO score to be in the mid-600s, they might be more forgiving with your credit history. You likely will face higher interest rates with a poor score, but your application might not be rejected.
Debt consolidation and refinancing: If you have high credit card debt, you likely face an APR of over 20.00%. A P2P loan with a lower interest rate could be a good option to pay off the debt. This also might help in case you’re looking to consolidate or refinance other types of high-interest loans.
Fixed monthly payments: P2P loan repayment plans typically have fixed rates, so your monthly payment remains the same, enabling you to budget your finances properly.
No prepayment penalties: You don’t face penalties for paying off your loan early, which can help you save money spent on interest charges over time.
Cons of P2P lending
As with any financial transaction, there are some negatives to keep in mind when taking a P2P loan.
There are fees for borrowers: Many peer-lending products have an origination fee of 1% to 6% of the loan amount. That sometimes can be higher than the fees on personal loans from a bank.
Interest rate could be high: Although some lenders might offer a lower interest rate, others might charge a much higher rate than on a personal loan from a traditional source. That’s why you should research and consider multiple sources while borrowing money.
Lack of regulation could hurt: Although P2P companies are trying to offer customer protections, the industry itself is relatively new and therefore prone to problems arising from lack of regulation. This can put both borrowers and lenders at risk.
Service not available everywhere: Not all states allow P2P lending, so double-check before deciding if it’s right for you.
Is P2P lending right for you?
If you’re looking for a loan to pay off credit card debt, buy a home, or start a business, a P2P product might be a fast, easy, and cost-effective option. But just like when applying for a private student loan or personal loan, it’s best to understand how peer lending works and consider offers from multiple lenders to find the best rates.
A lack of regulations for the relatively new marketplace of P2P lenders means borrowing from a traditional lender could work better for your financial situation. Evaluate the pros and cons before making a decision and make sure you have the funds to pay back the loan.
Interested in a personal loan?Here are the top personal loan lenders of 2018!
|Lender||APR Range||Loan Amount|
|1 Includes AutoPay discount. Important Disclosures for SoFi.
2 Includes AutoPay discount. Important Disclosures for Payoff.
3 Important Disclosures for FreedomPlus.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
5 Important Disclosures for LendingPoint.
6 Important Disclosures for LendingClub.
All loans made by WebBank, Member FDIC. Your actual rate depends upon credit score, loan amount, loan term, and credit usage & history. The APR ranges from 6.16% to 35.89%. For example, you could receive a loan of $6,000 with an interest rate of 7.99% and a 5.00% origination fee of $300 for an APR of 11.51%. In this example, you will receive $5,700 and will make 36 monthly payments of $187.99. The total amount repayable will be $6,767.64. Your APR will be determined based on your credit at time of application. The origination fee ranges from 1% to 6% and the average origination fee is 5.49% as of Q1 2017. There is no down payment and there is never a prepayment penalty. Closing of your loan is contingent upon your agreement of all the required agreements and disclosures on the www.lendingclub.com website. All loans via LendingClub have a minimum repayment term of 36 months or longer.
7 Important Disclosures for Earnest.
8 Important Disclosures for Avant.
* The actual rate and loan amount that a customer qualifies for may vary based on credit determination and other factors. Funds are generally deposited via ACH for delivery next business day if approved by 4:30pm CT Monday-Friday. Avant branded credit products are issued by WebBank, member FDIC.
** Example: A $5,700 loan with an administration fee of 4.75% and an amount financed of $5,429.25, repayable in 36 monthly installments, would have an APR of 29.95% and monthly payments of $230.33
* Important Disclosures for Upgrade Bank.
Upgrade Bank Disclosures
** Accept your loan offer and your funds will be sent to your bank via ACH within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes this transaction. From the time of approval, funds should be available within four (4) business days.
|7.73% – 29.99%||$1,000 - $50,000||Visit Upstart|
|6.26% – 14.87%1||$5,000 - $100,000||Visit SoFi|
|6.99% – 35.97%*||$1,000 - $50,000||Visit Upgrade|
|8.00% – 25.00%2||$5,000 - $35,000||Visit Payoff|
|4.99% – 29.99%3||$10,000 - $35,000||Visit FreedomPlus|
|5.99% – 18.99%4||$5,000 - $50,000||Visit Citizens|
|15.49% – 34.49%5||$2,000 - $25,000||Visit LendingPoint|
|6.16% – 35.89%6||$1,000 - $40,000||Visit LendingClub|
|6.99% – 18.24%7||$5,000 - $75,000||Visit Earnest|
|9.95% – 35.99%8||$2,000 - $35,000||Visit Avant|