How Peer Lending Works

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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.

Peer-to-peer (P2P) lending, which connects consumers and investors, is on the rise. One company alone, LendingClub, facilitated more $33 billion in P2P loans in 2017.

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!
LenderAPR RangeLoan Amount 
1 Includes AutoPay discount. Important Disclosures for SoFi.

SoFi Disclosures

  1. Personal Loans: Fixed rates from 6.990% APR to 14.865% APR (with AutoPay). Variable rates from 6.255% APR to 12.555% APR (with AutoPay). SoFi rate ranges are current as of September 1, 2018 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 credit worthiness, years of professional experience, income and other factors. See APR examples and terms. Interest rates on variable rate loans are capped at 14.95%. Lowest variable rate of 6.255% APR assumes current index rate derived from the 1-month LIBOR of 2.08% plus 4.425% margin minus 0.25% AutoPay discount. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. 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.

    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.See Consumer Licenses.
  2. 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.
  3. SoFi Personal Loans are not available to residents of MS. Maximum interest rate on loans for residents of AK and WY is 9.99% APR, for residents of IL with loans over $40,000 is 8.99% APR, for residents of TX is 9.99% APR on terms greater than 5 years, for residents of CO, CT, HI, VA, SC is 11.99% APR, and for residents of ME is 12.24% APR. Personal loans not available to residents of MI who already have a student loan with SoFi. Personal Loans minimum loan amount is $5,000. Residents of AZ, MA, and NH have a minimum loan amount of $10,001. Residents of KY have a minimum loan amount of $15,001. Residents of PA have a minimum loan amount of $25,001. Variable rates not available to residents of AK, TX, VA, WY, or for residents of IL for loans greater than $40,000.
  4. 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 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.

3 Important Disclosures for FreedomPlus.

FreedomPlus Disclosures

  1. All loans available through FreedomPlus.com are made by Cross River Bank, a New Jersey State Chartered Commercial Bank, Member FDIC, Equal Housing Lender. All loan and rate terms are subject to eligibility restrictions, application review, credit score, loan amount, loan term, lender approval, and credit usage and history. Eligibility for a loan is not guaranteed. Loans are not available to residents of all states – please call a FreedomPlus representative for further details. The following limitations, in addition to others, shall apply: FreedomPlus does not arrange loans in: (i) Arizona under $10,500; (ii) Massachusetts under $6,500, (iii) Ohio under $5,500, and (iv) Georgia under $3,500. Repayment periods range from 24 to 60 months. The range of APRs on loans made available through FreedomPlus is 4.99% to a maximum of 29.99%. APR. The APR calculation includes all applicable fees, including the loan origination fee. For Example, a four year $20,000 loan with an interest rate of 15.49% and corresponding APR of 18.34% would have an estimated monthly payment of $561.60 and a total cost payable of $7,948.13. To qualify for a 4.99% APR loan, a borrower will need excellent credit on a loan of $15,000 with a term of 24 months, and qualify for at least two of the following discounts: (1) add a co-borrower who has sufficient income; (2) use at least fifty percent of the loan proceeds to directly pay off existing debt; or (3) show proof of having at least forty-thousand dollars in retirement savings – contact FreedomPlus for further details.

4 Important Disclosures for Citizens Bank.

Citizens Bank Disclosures

  1. Personal Loan Rate DisclosureFixed interest rates from 6.49% – 19.49% (6.49% – 19.49% APR) based on applicable terms. Lowest rates range from 5.99%-18.99% (5.99%-18.99% APR), are for eligible applicants, require a 3-year repayment term, and include our Loyalty and Automatic Payment Discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
  2. Loyalty Discount: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower has a qualifying account in existence with us at the time the borrower has submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, student loans or other personal loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI and VT. This discount will be reflected in the interest rate and Annual Percentage Rate (APR) disclosed in the Truth-In-Lending Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan, and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
  3. Automatic Payment Discount: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their Citizens Bank Personal Loan during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account two or more times within any 12-month period, the borrower will no longer be eligible for this discount.

5 Important Disclosures for LendingPoint.

LendingPoint Disclosures

  • Loan approval is not guaranteed. Actual loan offers and loan amounts, terms and annual percentage rates (“APR”) may vary based upon LendingPoint’s proprietary scoring and underwriting system’s review of your credit, financial condition, other factors, and supporting documents or information you provide. Origination or other fees from 0% to 6% may apply depending upon your state of residence. Upon LendingPoint’s final underwriting approval to fund a loan, said funds are often sent via ACH the next non-holiday business day. LendingPoint makes loan offers from $2,000 to $25,000, at rates ranging from a low of 15.49% APR to a high of 34.49% APR, with terms from 24 to 48 months. The loan offer(s) shown reflect a 28 day payment cycle which is being offered as a courtesy as many of our customers are paid on a biweekly schedule and thus this may better align the loan payment dates with your actual income receipt schedule.

6 Important Disclosures for LendingClub.

LendingClub Disclosures

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.

Earnest Disclosures

  1. Earnest does not lend in Alabama, Delaware, Kentucky, Nevada, or Rhode Island.

8 Important Disclosures for Avant.

Avant Disclosures

* 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

* Your loan terms are not guaranteed and are subject to our verification and review process. You may be asked to provide additional documents to enable us to verify your income and your identity. This rate includes an Autopay APR reduction of 0.5%. By enrolling in Autopay your payments will be automatically deducted from you bank account. Selecting Autopay is optional. Annual Percentage Rate is inclusive of a loan origination fee, which is deducted from the loan proceeds. Late payments or subsequent charges and fees may increase the cost of your fixed rate loan. All loans made by WebBank, member FDIC. Please refer to Upgrade’s Terms of Use and Borrower Agreement for all terms, conditions and requirements.

** 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 - $50,000Visit Upstart
6.26% – 14.87%1$5,000 - $100,000Visit SoFi
6.99% – 35.97%*$1,000 - $50,000Visit Upgrade
8.00% – 25.00%2$5,000 - $35,000Visit Payoff
4.99% – 29.99%3$10,000 - $35,000Visit FreedomPlus
5.99% – 18.99%4$5,000 - $50,000Visit Citizens
15.49% – 34.49%5$2,000 - $25,000Visit LendingPoint
6.16% – 35.89%6$1,000 - $40,000Visit LendingClub
6.99% – 18.24%7$5,000 - $75,000Visit Earnest
9.95% – 35.99%8$2,000 - $35,000Visit Avant
Our team at Student Loan Hero works hard to find and recommend products and services that we believe are of high quality and will make a positive impact in your life. We sometimes earn a sales commission or advertising fee when recommending various products and services to you. Similar to when you are being sold any product or service, be sure to read the fine print understand what you are buying, and consult a licensed professional if you have any concerns. Student Loan Hero is not a lender or investment advisor. We are not involved in the loan approval or investment process, nor do we make credit or investment related decisions. The rates and terms listed on our website are estimates and are subject to change at any time. Please do your homework and let us know if you have any questions or concerns.