Personal Loans

Peer-to-Peer Loans: What They Are and Where to Find Lenders

Peer-to-peer (P2P) lending allows you to borrow a personal loan that is funded by people and/or institutions rather than just a bank, credit union or online lender. Peer-to-peer loans are available via online marketplaces, and the application process is similar to what you’d see with a typical personal loan.

The difference, however, is that various people will review your application and decide whether to fund the loan. Those who choose to fund your loan earn money off your interest payments.

Keep reading to learn more about this financing option and how to get started.

What are peer-to-peer loans?

P2P loans are unsecured personal loans that are generally funded by multiple people and/or institutions rather than a single traditional lender. These loans can be accessed through an online marketplace that acts as a matchmaking service to connect you with investors. Like personal loans, they come with fixed interest rates and a fixed repayment term, both determined by the P2P marketplace.

When you apply for a P2P loan, the online lending service will often ask you about the purpose for your loan, evaluate your creditworthiness and, if you’re eligible, present your loan application to potential investors who may decide to fund all or part of your loan. (Often multiple investors will fund your loan.)

Because your loan application must be evaluated and funded by investors, it can take several days for your loan to be funded. There’s also a chance that your loan won’t be fully funded. That said, because your loan application is being put in front of people, P2P lending is generally friendlier to borrowers with less-than-perfect or even bad credit.

Peer-to-peer loans: Pros and cons
Pros Cons
  • Faster decision making on loan approval
  • Convenience and ease of applying online
  • Generally fewer documentation requirements
  • Higher origination fees
  • Shorter-term loans
  • Greater likelihood of needing a cosigner or collateral

P2P marketplaces function entirely online. Unlike with traditional lenders, you won’t go to a bank or credit union to apply for a personal loan. Popular P2P lending marketplaces include LendingClub, Peerform and Prosper.

Explore these P2P loan options

Peerform

  • APR: 5.99% to 29.99%
  • Loan amount: Up to $25,000
  • Loan terms: 36 or 60 months
  • Origination fee: 1.00% - 5.00% of loan amount
  • Minimum credit score: 600
  • Prequalify with soft credit inquiry: Yes

Peerform is a P2P lending platform focused on lower-credit borrowers and small businesses. It offers a lower starting and maximum APR than the other marketplaces shown here but a much lower maximum borrowing limit. It’s also unclear how quickly loan funds will be deposited into your bank account.

Read our Peerform Review

LendingClub

  • APR: 10.68% to 35.89%
  • Loan amount: $1,000 to $40,000
  • Loan terms: 36 or 60 months
  • Origination fee: 2.00% - 6.00% of loan amount
  • Minimum credit score: 600
  • Preapproval with soft credit inquiry: Yes

LendingClub is a P2P lending marketplace that is geared toward individuals and small businesses seeking faster and easier access to small loans. Their personal loans tend to focus on credit card refinancing, debt consolidation, home improvement projects and balance transfer loans.

Like Prosper, LendingClub has a high maximum APR, but its minimum loan amount is impressively low. Upon application approval, loan funds can be deposited into your bank account within four days. This is reasonable among P2P services but slow when compared to traditional lenders.

Read our LendingClub Review

Prosper

  • APR: 7.95% to 35.99%
  • Loan amount: $2,000 to $40,000
  • Loan terms: 36 or 60 months
  • Origination fee: 2.41% - 5.00% of loan amount
  • Minimum credit score: 640
  • Preapproval with soft credit inquiry: Yes

Prosper comes with a high starting origination fee and the second-highest minimum APRs in this roundup. Qualifying may be harder too, as Prosper comes with a higher minimum credit score, but borrowers can receive loan funding within three days of loan approval.

Read our Prosper Review

How to qualify for a peer-to-peer loan

Peer-to-peer lending marketplaces use a variety of criteria to determine borrower creditworthiness. Requirements depend on the platform you choose. P2P loans are unconventional loans because they’re not underwritten by banks, so each marketplace creates its own rules as to information and documentation requirements. Therefore, it’s important you understand the implications of taking out a P2P loan as well as its repayment terms.

Among the information a P2P lender may ask you to provide are the following:

  • A statement of the purpose of the loan
  • The loan amount requested
  • Your repayment plan
  • A business plan (if you’re applying as a small business)
  • Financial documents that demonstrate your ability to repay the loan
  • Information about any cosigners on the loan

Tips for qualifying for a peer-to-peer loan

  • Prepare your documentation in advance: Collect W-2s, pay stubs or other proof of income, and be prepared to share information about your employer. It’s also a good idea to have recent tax returns and bank statements available if you don’t have a W-2, are self-employed or are not currently employed.
  • Check your credit score, and improve it if necessary: You could qualify for interest rates as low as 2.49% with a good credit score. Even if you have bad credit, you may still qualify for a loan at a higher rate, but if qualifying is a problem because of your credit history, work on improving it. Make sure you hold a job for at least a year, pay down some of your debt if possible and make sure to pay all of your bills (rent, utilities, credit cards) on time.
  • Show P2P lenders you’re a responsible borrower: One reason you may be seeking a P2P loan in the first place is because you lack credit history. Perhaps you’re a student or a recent graduate. In that case, if you can demonstrate with school transcripts that you’ve gotten good grades and been reliable at a part-time student job, you may still qualify for a loan.
  • Make sure you have proof of U.S. citizenship and meet other requirements: Most peer-to-peer lenders won’t provide you a loan if you can’t prove you’re a U.S. citizen. Most also have age and residence requirements, so make sure you know if P2P loans are available in your state and for your age group.

FAQ: Peer-to-peer loans

How can you use P2P loans?

Borrowers use peer-to-peer loans in many of the same circumstances they’d use a personal loan from a bank. Those might include consolidating debt, paying off credit cards, financing a vehicle purchase and funding a home improvement project.

How do I become a P2P investor?

Becoming a P2P investor is relatively simple, though most peer-to-peer lending platforms will have basic requirements you have to meet. LendingClub, for example, requires investors to be at least 18, have a valid Social Security number and to make a minimum deposit of $1,000. Check individual P2P platform websites for platform-specific requirements.

Are peer-to-peer loans available for small businesses?

Peer-to-peer loans can be a great option for small businesses who need capital to grow. A small business without a long history might find a P2P loan easier to obtain. Small businesses can use P2P lending for things like opening a new location, hiring more employees or buying inventory.

What are possible options for peer-to-peer lending with bad credit?

Obtaining a peer-to-peer loan with bad credit can be more challenging but many P2P lenders, like Peerform, specialize in providing loans to borrowers with bad credit scores. It’s important to understand, however, that if you have poor credit, your interest rates will likely be high. And to avoid further damaging your credit score, make sure to make on-time loan payments and try to pay more than the minimum amount if possible.

Is peer-to-peer lending a good idea?

Peer-to-peer loans can be a good option for borrowers looking for fast and convenient access to funds as well as for borrowers who have a harder time qualifying for loans with traditional lenders due to poor credit or documentation requirements. Many P2P lenders will fund borrowers with credit scores as low as 600.

It’s important to understand the risks of taking out a P2P loan, however, including the possibility that you could just get into deeper debt, especially with a high-interest loan, and that you may have to pay hefty origination fees.

 

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