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What is peer-to-peer lending? | The bank rate

Peer-to-peer lending, or P2P lending, connects borrowers with a network of investors. Unlike a traditional lender, the investors you are connected with – a group of people (peers) or a business – decide whether or not to fund your loan. Although the same factors are used to assess your loan application as a traditional loan, the eligibility requirements are often not as strict.

For example, some P2P lenders allow applicants to qualify with a credit score as low as 600. However, before taking out a peer-to-peer loan, weigh the pros and cons to see if it makes sense based on your situation. financial. .

Be pre-qualified

Answer a few questions to find out which personal loans you are prequalified for. The process is quick and easy and will not affect your credit score.

What is the loan between individuals?

Peer-to-peer loans take investors – both individuals and businesses – directly to the people who need to borrow money. Traditional personal loans come from institutions, such as banks, credit unions, or online lenders. Peer-to-peer lending involves borrowing money from a person or business that invests in your loan.

How does the loan between individuals work?

Most peer-to-peer loans are organized through online lending platforms. The whole process takes place online and usually has a short turnaround time. Here is how it works:

  1. Prequalification: Check if you are eligible for a peer-to-peer loan through the site’s prequalification process. If your application is accepted, a lender will give you an estimate of the loan terms and annual percentage rate (APR) – your interest rate, plus any fees – could be after you submit a formal request.
  2. Application: If you qualify and like the terms and rate offered, submit a formal request. Subsequently, a lender will perform a thorough credit check, which will cause your credit score to drop temporarily.
  3. Approval: Then wait for a lender to decide whether or not to approve your loan.
  4. Funding: Once approved, your loan will move on to the financing phase, where several investors will review your loan. Investors will spend or agree to fund all or part of your loan, depending on how much you want to borrow.
  5. Electronic funds transfer: Once your loan gets enough investors, you will get your money, usually through an electronic transfer. In some cases, your funds can be deposited in as little as one business day.
  6. Loan payments: When it comes time to repay your loan, you will make fixed monthly payments that will be paid to all investors on your loan based on your repayment terms.

To remember : When looking for a peer-to-peer loan, prequalify with as many lenders as possible to find the best deal.

What fees do peer-to-peer lenders charge?

The most common fees that you will come across with peer-to-peer lenders are a original fee, which is typically up to eight percent of your loan amount. These fees are billed up front or deducted from your total loan amount. You may also be charged late fees if you miss a payment. Other fees will depend on the lender you are working with.

To remember : Before taking out a P2P loan, understand what fees, if any, they charge. A set-up fee can drastically reduce your loan amount.

How does it work if I want to lend money?

If you want to lend money through a peer-to-peer lending provider, you will create an account on the platform of your choice and go through the loan options and terms. There is a risk associated with this investment, and some platforms will help you make decisions on individual loans while others will disperse your money automatically. You will be able to follow the repayment of the loan through your account.

Is the loan between individuals safe?

Peer-to-peer lending platforms are not traditional banks or online lenders, which might make you nervous about borrowing from them. That said, investors take the most risk; if borrowers don’t repay their loans and they default, investors are unlikely to get their money back.

When it comes to security, peer-to-peer platforms protect your personal and financial information like a traditional bank or online lender would.

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, Like:

Some loans have restrictions. For example, you may not be able to use your loan to pay for graduate school fees. Most won’t let you use your money to gamble.

Where can I get a P2P loan?

There are many online marketplaces that offer P2P loans. Here are some popular P2P platforms to help you start your research:

  • Prosper: Founded in 2005, Prosper was the premier peer-to-peer lender in the United States. It offers personal loans to qualified borrowers ranging from $ 2,000 to $ 40,000; origination fees range from 2.41% to 5%. To qualify, you must have a minimum FICO score of 640.
  • Reached: Upstart is a P2P lender that allows qualified applicants to borrow from $ 1,000 to $ 50,000; it has origination fees that range from zero percent to eight percent. To qualify you must have a FICO or Vantage Score of 600.
  • Fundraising circle: Funding Circle connects borrowers seeking small business loans with a network of investors. It offers term loans of up to $ 500,000 and a line of credit of up to $ 150,000 to qualified applicants.
  • Kiva: This non-profit organization connects borrowers who need cash to finance their small business with a network of lenders who are not looking for profit. Instead of using your credit history as a key factor, Kiva asks 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 funding.

Advantages and disadvantages of the loan between individuals

If you are considering taking out a personal loan through a peer-to-peer marketplace, first make sure you know the pros and cons.

Advantages

  • Fair credit authorized: Some peer-to-peer markets allow borrowers to have credit scores as low as 600. That’s good news if you don’t have good credit – or a lot of credit at all – and you can’t. not find a loan by other means.
  • Fast funding process: As with all online lenders, you will complete your application within minutes, and if your application is approved, you can expect to receive your money within days. Some banks and credit unions may take significantly longer to fund your loan, or may require in-person applications.

The inconvenients

  • You could have more costs: Peer-to-peer lenders tend to charge origination fees ranging from 1% to 8% of your loan amount. Not all charge this fee, but you’ll want to review all of the fees before you complete an application.
  • You could have a higher interest rate: Depending on your peer-to-peer market, you might have a higher interest rate than traditional lenders. Your credit score also determines your interest rate: the lower your score, the higher your rate. Research the best peer-to-peer loan rates before completing an application.

Loans between individuals vs bank loans

The main difference between peer-to-peer loans and bank loans is who finances them. If the money is from a lender who is an individual or a group on a web platform, then it is a peer-to-peer loan. If the money comes from a credit union, bank or other financial institution, it is called a bank loan.

Many banks offer some of the lowest rates available, which is attractive to borrowers with excellent credit. If you already have an account with a traditional bank, you may want to explore personal loans through it. That said, banks tend to have stricter qualification requirements and slower funding times.

Loan amounts and repayment terms for bank loans and peer-to-peer loans are similar, but if you only need to borrow a little money to hold you back, consider looking for peer-to-peer lenders that offer small amounts.

LOANS BETWEEN PEERS BANK LOANS
Funds from individuals or groups of people Funds from financial institutions
Flexible options for people with less credit history Stricter qualifications
Online application May require in-person request

Be pre-qualified

Answer a few questions to find out which personal loans you are prequalified for. The process is quick and easy and will not affect your credit score.

The bottom line

While peer-to-peer lenders offer personal loans like other financial institutions, they are not quite the same. This type of loan takes you directly to the lenders. It is an investor who finances your loan, not a bank.

If you don’t have a lot of credit or want to cut out the middleman, a peer-to-peer loan may be ideal for you. But before you fill out an application, you’ll want to compare:

  • Interest rate
  • Costs
  • Repayment Terms
  • Loan amounts
  • It’s time to get funded

Not all lenders or markets work the same. Make sure you have done your research before applying for a personal loan through a peer-to-peer market.

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