Peer-to-Peer Lending

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What is a peer-to-peer loan?

Peer-to-peer lending (P2P) is unique. Instead of going to a bank for a traditional loan, you borrow from individual people. But unlike the type of personal loan you’re used to — one from a family member or friend – with a peer-to-peer loan, you borrow money from actual strangers.

P2P lending typically takes place on an online platform — sort of a loan matchmaking service — that connects borrowers with investors who supply the funds. The online company coordinates the loan, transfers the money to the borrower and repays the investors as you pay off your loan.

Here’s what to know about peer-to-peer lending, including where to find funding.

  • Paying off credit cards
  • Consolidating debt
  • Financing a vehicle
  • Paying for medical fees
  • Funding home improvements
  • Covering special occasion costs
  • Taking care of moving expenses
  • Growing a business

Top peer-to-peer lending options

Lender Specialty APR Loan size Credit score minimum
Funding Circle Secured small business loans, lines of credit 4.99%–19.49% $25,000 to $500,000 630
Peerform Unsecured personal loans 5.99%–29.99% $4,000 to $25,000 600
Prosper Unsecured personal loans 7.95%–35.99% $2,000 to $40,000 640

Funding Circle

Since 2010, Funding Circle has connected 100,000 borrowers internationally with more than $15 billion in funding, specializing in small business loans and lines of credit.

Pros Cons
  • Slick digital borrowing experience makes applying, repayment easier
  • Variety of repayment term options (spanning six months to five years)
  • Business in some industries, such as marijuana dispensaries, are ineligible
  • Funding Circle loans are secured loans, so business assets serve as collateral

Lender details:

  • No application fee
  • Six-minute online application
  • Application approval or denial within 24 hours
  • Next-day funding after loan acceptance
  • Borrow $25,000 to $500,000
  • Fixed interest rates and monthly payments
  • Origination fee of 3.49% to 6.99%
  • No prepayment penalty
  • Eligibility criteria includes 630 credit score, two years in business
  • Funding not available in Nevada

See our full Funding Circle review here.

Peerform

Founded in 2010 by former Wall Street executives, Peerform allows you to post your desired loan on its marketplace (whether you’re looking to consolidate debt or pay for a big expense), and individual investors can choose whether or not to offer funding.

Pros Cons
  • Prequalify and check rates without penalty
  • Low origination fees for the most creditworthy applicants
  • Limited repayment term options (three or five years)
  • Minimum, maximum loan amounts less flexible than other lenders

Lender details:

  • No application fee
  • Borrow $4,000 to $25,000
  • Fixed interest rates and monthly payments
  • Origination fee of 1.00% - 5.00%
  • No prepayment penalty
  • Eligibility criteria includes 600 credit score
  • Loans not available in Connecticut, North Dakota, Vermont, West Virginia or Wyoming

See our full Peerform review here.

Prosper

This self-described “first peer-to-peer lending marketplace in the United States” claims that over 1 million consumers have borrowed via its platform since 2005. Like with Peerform, Prosper is an unsecured financing option for debt consolidation or financing large expenses like home improvements, business seeding and more.

Pros Cons
  • Prequalify and check rates without penalty
  • Low minimum and high maximum borrowing amounts available
  • Limited repayment term options (three or five years)
  • Stiffer eligibility criteria (though you can apply with a co-borrower)

Lender details:

  • Option to apply with a co-borrower
  • No application fee
  • As soon as next-day funding after loan acceptance
  • Borrow $2,000 to $40,000
  • Fixed interest rates and monthly payments
  • Origination fee of 2.41% - 5.00%
  • No prepayment penalty
  • Eligibility criteria includes 640 credit score

See our full Prosper review here.

How peer-to-peer lending works


Who’s lending the money?

When you apply for a P2P loan, potential investors — regular people who are looking to grow their money with your interest payments — review your request, choose whether to finance the loan and commit to funding all or just a part of it. (For this reason, there may be multiple people who are actually providing the capital you need.) Then, as you pay off your P2P loan, those investors receive regular payments until the loan term ends.

Why would others loan money to people they don’t know?

Investors participate as a way to earn money from your interest payments, diversify their portfolios, and even just to make a difference in the lives of people and small businesses.

How much can you borrow?

When you take out a personal peer-to-peer loan, you can generally request a loan between $1,000 and $40,000, although that varies by lender.

How do payments work?

Like most loans, a P2P loan typically requires you to repay the principal with interest in fixed monthly installments. That monthly payment amount depends on the size of your loan, the loan’s term and your APR, which likely includes an origination fee. An origination fee is typically a small percentage of the amount you want to borrow.

Keep in mind when you apply that the origination fee is deducted from the total amount of the loan before you receive it. So, if you’re approved for a $10,000 loan with a 5% origination fee (or $500), you’ll receive $9500 as a deposit in your account. Keep that in mind when you borrow, so you make sure you actually receive enough money for your goal.

How to apply for P2P lending

While each peer-to-peer lending company is unique, the application process generally looks something like this:
  1. COMPLETE A PRELIMINARY APPLICATION
    Fill out some personal information online, and describe how you intend to use the loan. The form generally takes only a few minutes to fill out.
  2. RECEIVE A BORROWER RATING BASED ON YOUR APPLICATION AND YOUR CREDIT SCORE
    You must complete the application form and submit qualifying documents, including proof of income. You need to provide your employer information and show pay stubs, W-2s, tax return forms or even bank statements.
  3. REVIEW YOUR LOAN OPTIONS
    If you qualify for a loan, you have the opportunity to look over the different terms of available peer-to-peer loans and select the one that best suits your needs.
  4. WAIT FOR INVESTORS TO CONSIDER YOUR APPLICATION
    At this stage, you receive notification that one or more investors are interested in funding your loan, or you find out that your loan hasn’t been funded. Don’t worry; investors make decisions quickly. In fact, the entire loan approval process typically takes about a week, unless the lender has to request additional documentation from you.
  5. COMPLETE A FULL APPLICATION
    If investors commit to funding your loan, provide the P2P lending company with additional details regarding your finances, as well as specified documentation to verify your identity, income and employment.
  6. RECEIVE LOAN APPROVAL
    If all the information you supplied checks out, the loan you requested is most likely approved at this point.
  7. GET YOUR MONEY
    Within a few days, the amount you’re borrowing — minus the origination fee — is deposited in your bank account. The exact timing depends on your P2P lending partner.
  8. PREPARE TO PAY OFF YOUR LOAN
    Once your loan term begins, your peer-to-peer lending company will automatically withdraw your monthly repayment amount from your bank account until the term of your loan ends.

Why a P2P loan might be right for you

There’s the sheer convenience of it

There’s no need to drive to one or more banks and spend time in uncomfortable, face-to-face meetings. Instead, you submit your application online, provide supporting documentation, review your options, choose your loan and receive your cash all from the comfort of your home.

P2P lending may be an option for you when you’re denied a traditional loan from a bank

If the bank denies you because you present certain risk factors, such as a low credit score or low income, your P2P loan options may be limited to those with high interest rates. Peerform’s top rate can get up to a whopping 29.99% fixed APR, and Prosper tops out slightly higher at 35.97% fixed APR. Still — if you really do need that cash — having that peer-to-peer loan as an option might be better than having no credit at all, or going with a riskier loan option like a payday loan or alternatives.

You might be able to secure seriously competitive terms if you have strong credit

Peerform’s personal loans start at 5.99% fixed APR. Prosper’s rates also run as low as 5.32% fixed APR. These can be much lower than alternative borrowing methods like a credit card, but, of course, you’ll need the best credit to get the lowest rates.

What could go wrong with P2P lending

What happens if your loan isn't approved or funded

So you’ve decided to apply for a peer-to-peer loan. You fill out your application and...you’re denied! Or no investors are interested in funding your loan. Here are a few reasons you might not be able to land your P2P loan right now:
  • YOUR CREDIT SCORE ISN’T SO HOT

    With most P2P lenders, you’re likely to have your loan application denied if your FICO Score is below 640 or perhaps 600. If you just squeak by the cutoff, you may have a few options, but they’ll probably come with a high interest rate.

  • YOU DON’T REALLY HAVE A CREDIT HISTORY

    Peerform, a prominent peer-to-peer lending company, tells you upfront that no credit usually means no P2P loan for you. Investors need to determine how likely you are to repay a loan. So, when you don’t have a documented history of financial responsibility, investors won’t want to take a chance on you.

  • YOU’RE ALREADY CARRYING A LOT OF DEBT

    If the amount of debt you have is very high when compared with your income, investors get scared. They worry that you’re already in over your head, so they steer clear of extending you any more credit.

  • YOU DON’T HAVE AN ESTABLISHED EMPLOYMENT RECORD

    Been at your job for only a few months? You’ll probably get turned down for a P2P loan. But, if everything else looks good on your application, your chances for loan approval increase once you’ve been employed for a full year.

  • YOUR BUSINESS IS TOO NEW

    Applying for a business loan? If you’re starting anew without sufficient assets and proven cash flow, you may find it difficult to secure financing via a peer-to-peer lender. Look at impressing lenders the same way as pitching investors on your big idea: Your financials need to be strong, but you must also have a clear vision for growth.

  • YOU APPEAR TOO RISKY TO INVESTORS

    Keep in mind that the decision to fund your loan is up to the individual investors. When someone defaults on a loan, the lender doesn’t get back his money and walks away with nothing. So he or she will be looking to invest as safely as possible — not in someone who seems like a big financial risk.

  • YOUR BUSINESS APPEARS TOO RISKY

    Funding Circle, for instance, looks at your credit score, your business cash flow and even its customer reviews. Before writing a policy, their underwriters ensure that they understand how your business is generating revenue right now, how the loan you want will boost your revenue and whether they can reasonably expect you to repay the loan. Businesses in some industries, such as gambling, marijuana dispensaries or speculative real estate are ineligible for a loan.

What to do if you’re denied or your loan isn't funded

  • WHAT TO DO IF YOU ARE DENIED OR YOUR LOAN ISN'T FUNDED?

    Many credit cards publish your current score directly on your monthly billing statement. (Ask your card company if you can’t find it on your paper statement or online.) You can also get a copy of your free credit score online.

  • BOOST YOUR CREDIT WORTHINESS

    Rebuilding your credit takes time, but you can make great progress by committing to paying all your bills on time, keeping your debt low and keeping old cards open.

Apply somewhere else. Each peer-to-peer lender is different when it comes to application approval criteria, loan options offered, and investors available. So if you luck out on one site, check out one or more other P2P lending sites. Be sure to review our tips below for choosing a reputable lender.

Why it pays to shop around for peer-to-peer lending


You already know that shopping around for a loan may be necessary if one lender flat out turns you down. But you should seriously consider checking out a number of options even if you are approved.

When you compare your options across two or more P2P lending sites, you’ll find different loan options and a variety of investor pools. Remember: Your interest rate is dependent upon a number of factors, including your credit score and loan term. And every P2P lending company has its own way of determining how risky you are, so one might view you more favorably than another.

When you do shop around, keep a few rules of thumb in mind:

  • Make sure you’re working with a company that’s been in a business for at least a few years and offers you access to a large pool of investors. Major players include Prosper, Peerform and Funding Circle.
  • Do your research. Check with resources like Better Business Bureau (BBB), and read customer reviews to make sure that the companies you’re considering are above board.
  • Make sure that the P2P lending competitor operates in your area. Many lenders are limited to certain countries and don’t do business in a handful of states.

Alternatives to P2P lending

If you don’t qualify for peer-to-peer lending or you don’t think that one is right for you, you still have plenty of options when it comes to getting some credit. A few popular choices include the following:
  • PERSONAL LOAN

    Find and apply for a personal loan by checking out what your local bank or credit unions are offering; then, follow up by comparing offers from multiple lenders online.

  • TRADITIONAL BUSINESS LOAN

    If you’re looking to grow your business and need the capital to do it, you may want to look into special business-only loans available from banks or investors.

  • HOME EQUITY LOAN, HOME EQUITY LINE OF CREDIT OR REVERSE MORTGAGE

    If you have equity in your home, you may be able to transform it into cash that you borrow against.

  • CREDIT CARD

    Credit cards are a form of unsecured debt — so no one can take your house or your car if you default — but nonpayment can tank your score. Before you use your cards, check your available line of credit and your monthly interest rate.

No matter what type of loan you choose, always make sure that you understand all of your financial responsibilities before you sign on the dotted line.

Peer-to-peer lending is a special option that comes with its own requirements, terms and conditions. In today’s climate, P2P lending may be an excellent way for you to supplement your personal life or your growing business.