How Peer-to-Peer Lending Works

 September 24, 2020
How Student Loan Hero Gets Paid

How Student Loan Hero Gets Paid

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Peer-to-peer lending connects consumers directly to investors offering loans, thereby cutting out the middleman of a bank or other lender. Peer-to-peer (P2P) lending marketplaces such as LendingClub and Prosper make it easy for individuals to access loans without relying on a third-party financial institution.

This approach to borrowing can be beneficial if it provides better rates on a loan, but it’s still worth shopping around with a few lenders to find your best loan that’s most suitable for your needs.

Let’s answer the following key questions about peer lending:

What is peer-to-peer lending?

Traditionally, if you needed a loan, you would head to a bank or other 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 purpose of the loan, and you’ll need to go through an application process.

How does peer-to-peer lending work?

Peer lending works by applying for a loan on a P2P marketplace website 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 score. Your creditworthiness 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. There’s typically no penalty if you repay early to get out of debt faster and save money on interest.

Unsecured personal loans are the most common P2P loan type. You can typically use the money to buy a new car, make improvements to your home, consolidate credit card debt or fund a new business venture.

How do you 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 usually need to be at least 18 years old, have a valid Social Security number and bank account. You will also need to provide personal information such as your birthdate and address. For certain types of loans, like the ones below, you may be asked to provide other data.

  • Personal loans. A lender could consider your credit score, debt-to-income (DTI) ratio, employment status, salary and other financial factors 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 payment and education history.
  • Business loans. A lender could ask you to provide information on factors such as the amount of 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.

What are the pros and cons of P2P lending?

Like any financial product, peer-to-peer lending has a number of potential benefits and drawbacks for consumers. Here’s a quick rundown of each side of the P2P coin:

Pros of P2P lending

  • Potential for lower interest rates. The P2P marketplace is competitive, so you could potentially 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 necessarily disqualify you. Although P2P lenders take your credit score into consideration, 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 could 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

  • There may be fees for borrowers. LendingClub personal loans, for example, come with an origination fee of 2% to 6% of the loan amount. That may be higher than the fees you’d find 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 to see if it’s available for you.

Is P2P lending right for you?

If you’re looking for a loan to pay off credit card debt or finance a big purchase, a P2P product might be a fast, easy and cost-effective option. But just like when applying for a private student loan or a personal loan, it’s important to understand how peer lending works and consider offers from multiple lenders to find your best rates.

A lack of regulations for the relatively new marketplace of P2P lenders could mean that 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 any loan you take out.

Rebecca Safier contributed to this report.

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LendingTree allows you to compare rates from multiple lenders by filling out one easy form. How Student Loan Hero Gets Paid

How Student Loan Hero Gets Paid

Student Loan Hero is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). Student Loan Hero does not include all lenders, savings products, or loan options available in the marketplace.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Student Loan Hero is an advertising-supported comparison service. The site features products from our partners as well as institutions which are not advertising partners. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.

How Student Loan Hero Gets Paid

How Student Loan Hero Gets Paid

Student Loan Hero is compensated by companies on this site and this compensation may impact how and where offers appear on this site (such as the order). Student Loan Hero does not include all lenders, savings products, or loan options available in the marketplace.

Advertiser Disclosure

Student Loan Hero Advertiser Disclosure

Student Loan Hero is an advertising-supported comparison service. The site features products from our partners as well as institutions which are not advertising partners. While we make an effort to include the best deals available to the general public, we make no warranty that such information represents all available products.

RATES (APR)loan amount
5.99% – 18.85%1 $5,000 to $100,000
4.37% – 35.99% $1,000 to $50,000
5.94% – 35.97%* $1,000 to $50,000
99.00% – 199.00%2 $500 to $4,000
5.99% – 24.99%3 $5,000 to $40,000
7.99% – 29.99%4 $7,500 to $40,000
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1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Fixed rates from 5.99% APR to 18.85% APR (with AutoPay). SoFi rate ranges are current as of March 19, 2020 and are subject to change without notice. Not all rates and amounts available in all states. See Personal Loan eligibility details. Not all applicants qualify for the lowest rate. If approved for a loan, to qualify for the lowest rate, you must have a responsible financial history and meet other conditions. Your actual rate will be within the range of rates listed above and will depend on a variety of factors, including evaluation of your creditworthiness, years of professional experience, income and other factors. See APR examples and terms. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account.
  2. To check the rates and terms you qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull.
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  3. Minimum Credit Score: Not all applicants who meet SoFi’s minimum credit score requirements are approved for a personal loan. In addition to meeting SoFi’s minimum eligibility criteria, applicants must also meet other credit and underwriting requirements to qualify.
  4. If you lose your job through no fault of your own, you may apply for Unemployment Protection. SoFi will suspend your monthly SoFi loan payments and provide job placement assistance during your forbearance period. Interest will continue to accrue and will be added to your principal balance at the end of each forbearance period, to the extent permitted by applicable law. Benefits are offered in three month increments, and capped at 12 months, in aggregate, over the life of the loan. To be eligible for this assistance you must provide proof that you have applied for and are eligible for unemployment compensation, and you must actively work with our Career Advisory Group to look for new employment. If the loan is co-signed the unemployment protection applies where both the borrower and cosigner lose their job and meet conditions.
  5. Terms and Conditions Apply: SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet SoFi’s underwriting requirements. Not all borrowers receive the lowest rate. To qualify for the lowest rate, you must have a responsible financial history and meet other conditions. If approved, your actual rate will be within the range of rates listed above and will depend on a variety of factors, including term of loan, a responsible financial history, years of experience, income and other factors. Rates and Terms are subject to change at anytime without notice and are subject to state restrictions. SoFi refinance loans are private loans and do not have the same repayment options that the federal loan program offers such as Income Based Repayment or Income Contingent Repayment or PAYE. Licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. SoFi loans are originated by SoFi Lending Corp., NMLS # 1121636. (www.nmlsconsumeraccess.org)
2 Includes AutoPay discount. Important Disclosures for Opploans.

Opploans Disclosures

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Opploans currently operates in these states: . *Approval may take longer if additional verification documents are requested. Not all loan requests are approved. Approval and loan terms vary based on credit determination and state law. Applications processed and approved before 7:30 p.m. ET Monday-Friday are typically funded the next business day.

  1. To qualify, a borrower must (i) be a U.S. citizen or permanent resident; (ii) reside in a state where OppLoans operates; (iii) have direct deposit; (iv) meet income requirements; (v) be 18 years of age (19 in Alabama); and, (vi) meet verification standards.
  2. NV Residents: The use of high-interest loans services should be used for short-term financial needs only and not as a long-term financial solution. Customers with credit difficulties should seek credit counseling before entering into any loan transaction.

  3. OppLoans performs no credit checks through the three major credit bureaus Experian, Equifax, or TransUnion. Applicants’ credit scores are provided by Clarity Services, Inc., a credit reporting agency.

  4. Based on customer service ratings on Google and Facebook. Testimonials reflect the individual’s opinion and may not be illustrative of all individual experiences with OppLoans. Check loan reviews.

  5. Rates and terms vary by state.

3 Includes AutoPay discount. Important Disclosures for Payoff.

Payoff Disclosures

  1. All loans are subject to credit review and approval. Your actual rate depends upon credit score, loan amount, loan term, credit usage and history. Currently loans are not offered in: MA, MS, NE, NV, OH, and WV.
4 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. The loan terms presented are not guaranteed and APRs presented are estimates only. To obtain a loan you must submit additional information and documentation and all loans are subject to credit review and our approval process. The range of APRs is 7.99% to 29.99% and your actual APR will depend upon factors including your credit score, usage and history, the requested loan amount, the stated loan purpose, and the term of the requested loan. To qualify for a 7.99% APR loan, a borrower will need excellent credit on a loan for an amount less than $12,000.00, and with a term equal to 24 months. Adding a co-borrower with sufficient income; using at least eighty-five percent (85%) of the loan proceeds to directly pay off qualifying existing debt; or showing proof of sufficient retirement savings, could help you also qualify for the lowest rate available. All loans are made by Cross River Bank and MetaBank®, N.A., Members FDIC.
* Important Disclosures for Upgrade Bank.

Upgrade Bank Disclosures

Personal loans made through Upgrade feature APRs of 5.94%-35.97%. All personal loans have a 2.9% to 8% origination fee, which is deducted from the loan proceeds. Lowest rates require Autopay and paying off a portion of existing debt directly. For example, if you receive a $10,000 loan with a 36-month term and a 17.98% APR (which includes a 14.32% yearly interest rate and a 5% one-time origination fee), you would receive $9,500 in your account and would have a required monthly payment of $343.33. Over the life of the loan, your payments would total $12,359.97. The APR on your loan may be higher or lower and your loan offers may not have multiple term lengths available. Actual rate depends on credit score, credit usage history, loan term, and other factors. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. There is no fee or penalty for repaying a loan early. Accept your loan offer and your funds will be sent to your bank or designated account within one (1) business day of clearing necessary verifications. Availability of the funds is dependent on how quickly your bank processes the transaction. From the time of approval, funds should be available within four (4) business days. Funds sent directly to pay off your creditors may take up to 2 weeks to clear, depending on the creditor. Personal loans issued by Upgrade’s lending partners. Information on Upgrade’s lending partners can be found at https://www.upgrade.com/lending-partners/.