Personal Loans

Peer-to-Peer Loans vs. Personal Loans

Until rather recently, if you needed to finance something in your personal life — your child’s wedding, perhaps — you would trot over to the bank and apply for a personal loan. If you weren’t a good candidate for borrowing, you were out of luck.

But with the advance of online financial businesses, a new type of lending option has emerged to fund people’s personal needs: peer-to-peer (P2P) lending. In a P2P transaction, an individual or group uses an online platform to lend money to another individual (or maybe a small business). While P2P lending is theoretically more personal than loans funded by corporate entities (a bank, for example), P2P loans still come from perfect strangers.

This relatively new form of lending opens up options for those looking for an infusion of cash— so it’s useful to know how P2P loans differ from traditional personal lending.

P2P loan vs. a personal loan

The main difference between P2P and personal loans is who is extending the loan to the borrower. If the funding is provided by individual lenders to individual borrowers, then it’s a P2P loan. If the funding is provided by a bank or credit union, then it’s a personal loan.

Comparing a P2P vs Personal Loan
P2P loan Personal loan
What is it? Loan from one person or group to another via a web-based platform A loan from a bank or other financial institution, usually unsecured
Typical interest rates 7.00% to 39.00% APR 6.00 to 36.00% APR
Advantages Looser eligibility requirements, fast decision-making, the convenience of online borrowing, the potential for good terms for borrowers with excellent credit Lower rates and better terms than P2P loans, security of borrowing from an established financial institution

 

Who is it good for? Those with less than stellar credit, and those who like the convenience and speed of borrowing online Those with good credit, and those who like the reliability of banks and credit unions

 Rates are accurate as of the date of publishing.

What are P2P loans?

P2P loans are administered by online companies that act as a middle-men between individual lenders and individual borrowers. These companies have proliferated in recent years, and competition in the space is robust.

How does this debt work?

P2P loans are made with after-tax dollars provided by individuals, who get their money back with interest as the borrower pays the loan back to the online lender administering the loan. Most P2P loans are unsecured, meaning there is no valuable asset put up as collateral. These loans may be secured to an asset in certain circumstances, but it is generally not a requirement.

P2P lenders may use various criteria to decide who is credit-worthy. The funding is not underwritten by banks, so the loans are considered unconventional and can have any kind of rules the lender wants to create. As such, these companies may ask for a wide range of information from potential borrowers.

Borrowers who approach the company with a funding request may be asked to provide a statement with their objective, needs, loan request, repayment plan, business plan (if the borrower is a small business) and financial documentation. After approval, the lender will often provide a term sheet outlining the loan terms, repayment plan and guarantees, if any. The company may require cosigners if there is any doubt about the borrower’s dependability.

Who is it useful for?

P2P loans can be useful to anyone seeking funding for the type of things personal lending typically covers, such as home repairs, medical expenses, special occasions and consolidating other debt. In particular, these loans may be available to individuals with lower credit ratings than traditional loans are, providing them with another option for borrowing if they are unsuccessful with a bank or credit union.

Those who want to convenience of working with a lender entirely online may be good candidates for P2P loans, as well as those with excellent credit who are shopping around for the best rates available. The flexibility of this lending option allows lenders to offer competitive terms to those they want most to attract.

Small businesses may find this type of lending useful if they have trouble getting financing elsewhere or want a very fast and convenient method of borrowing. Startups make up the majority of P2P funding requests received by Jim Angleton, president of AEGIS FinServ Corp, a fintech company that provides P2P loans on a case-by-case basis. Many of these are businesses that have been operating for a year or two and need funding to grow, acquire inventory or pay for operating expenses during times when receivables are slow to arrive.

How do interest rates/loan terms compare to other forms of borrowing?

P2P loans tend to have higher interest rates and shorter terms than traditional personal loans from banks and credit unions. Since personal loans have higher credit requirements, they are often able to offer lower rates and longer terms than P2P lenders are usually comfortable with.

Where can you get this type of loan?

P2P loans are administered by online companies designed to play an intermediary role between individuals who want to lend money and those who want to borrow. Some of the best-known options are LendingClub, Peerform and Funding Circle.

Pros and cons

The pros of P2P lending include faster decision-making, the convenience of working with an online lender , lower rates than credit cards and other borrowing of last resort, and potentially fewer documentation requirements than traditional banks.

Cons include potentially higher fees, shorter loan terms, the potential need for cosigners or collateral, and the possibility of more stringent loan repayment terms and reporting requirements.

What are personal loans?

Personal loans are a traditional form of lending meant to finance almost any consumer need. Banks are usually the lender for these types of loans, which are used for things such as home improvements, debt consolidation, special occasions and medical bills. These loans are often unsecured debt, as lenders usually provide these loans without requirements of collateral to secure the loan.

How does this loan work?

Individuals seeking funding apply for a loan of a given amount from a bank or credit union, which in return requests a wide variety of documentation to support the underwriting of the loan. They will check your credit score, which has a major impact on whether you can get approved, how much you can borrow, and what your terms will be.

How much you can borrow will also depend on your debt-to-income ratio (DTI), which puts the amount you owe each month in relation to how much money you earn. Lenders are only likely to approve lending that keeps your DTI below 43%.

Who is it useful for?

Personal loans are good for those who have strong credit, as traditional lenders have more stringent standards than other types of lenders. If you have good credit, you’ll be able to get better terms for a traditional personal loan than you’ll likely be able to get from other types of lenders, including P2P lenders.

How do interest rates/loan terms compare to other forms of borrowing?

The rates and loan terms for personal loans are some of the most advantageous you’ll find — the tough requirements for borrowing mean that borrowers get better options than those who can’t qualify.

Where can you get this type of loan?

Personal loans typically come from traditional lenders like banks, credit unions, and other financial institutions. Some of the most prominent lenders include Wells Fargo, TD Bank, Discover, and Citibank.

Online lenders such as Avant, RocketLoans, OneMain Financial, Goldman Sachs Bank USA, and SoFi also provide personal loans. You can receive personalized loan offers and compare lenders using LendingTree’s personal loan tool.

Pros and cons

The pros of personal loans mostly involve the favorable rates and terms those who can qualify will be able to secure. It also may be reassuring to some borrowers to work with an established and reputable bank or credit union instead of an online company.

The cons of traditional personal loans are that voluminous documentation may be needed and decision times can be long. You may also not qualify if your credit is less than stellar.

Which should you get?

The decision about which type of loan to seek will most likely be driven by what you’re likely to qualify for. Those whose credit and DTI allows them to compete for a traditional personal loan will probably want to target that type of funding. Someone whose situation drives them to look elsewhere may well find a good match in P2P lending.

“Credit health is usually a determining factor of which way to go,” says Ryan Fisher, president

of White Coat Wealth Management. “If you have a high credit rating, then a personal loan will be advantageous. If your credit score is below average, then a P2P loan might be the only option available. In either scenario, it is prudent to look at all fees and interest rates associated with each type of loan.”

Still, those who can qualify for a personal loan with a bank may be interested in P2P lending if they prize an easy online application and relatively fast decision-making. They may also be pleasantly surprised at the terms they are able to secure with a P2P lender.

Conclusion

With online innovators changing the way lending has typically been done, there has never before been such a wealth of options for those seeking personal loans. You’re likely to find a funding opportunity that will match your needs regardless of your credit.

P2P lenders are giving individual investors opportunities to support individual borrowers, a development that opens up new options for those who might not qualify for traditional lending.

If you’re in the market for a personal loan, it’s a good idea to research all the options, both traditional loans and P2P funding. There’s a possibility you’ll find this relatively new (and considerably more nimble) type of lending more your style. For those who feel comfortable with banks, though, there are still many lenders to choose from.

 

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