What is Peer-to-Peer Lending?
Peer-to-peer loans are a type of personal loan in which borrowers are connected to investors through a peer-to-peer lending platform. Like traditional personal loans, peer-to-peer lending comes as a lump sum with fixed interest rates.
While these types of personal loans are not very common, a handful of companies still offer this unique alternative to traditional personal loans.
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What is peer-to-peer lending?
Peer-to-peer lending (P2P lending), also known as marketplace lending, is a form of lending in which consumers receive personal loans funded by individual investors. With a P2P loan, it’s a person funding your loan instead of a traditional bank or financial institution.
To receive a peer-to-peer loan, you’ll typically complete an application on an online financial platform, disclosing your personal information, income, employment status and credit score. If you’re approved, the platform will try to match you with an investor who can choose whether to fund your loan.
Throughout the process, the online company coordinates the loan, transfers the money to the borrower and repays the investors as you pay off your loan.
Keep in mind that true peer-to-peer lenders are few and far between, with some companies shuttering those platforms.
How peer-to-peer lending works
While peer-to-peer lending companies don’t fund your loan, these companies do provide the platform to connect borrowers and investors as well as facilitate the process from start to finish.
How to apply for a peer-to-peer loan
While each peer-to-peer lending company is unique, the application process generally looks something like this:
1. Complete an application
First, you’ll need to fill out an application with the peer-to-peer lending platform. You’ll have to provide your personal information as well as your income, employment status and credit score. This process generally takes only a few minutes.
2. Review your options
Next, you may receive a borrower rating based on your application and credit score. You must submit qualifying documents, including proof of income. If you qualify for a loan, you’ll have the opportunity to look over the available loan terms and select the best one for you.
3. Wait for investor approval
At this stage, you’ll learn if one or more investors are interested in funding your loan or if your loan hasn’t been funded. If investors commit to funding your loan, you may need to provide additional details regarding your finances, as well as specified documentation to verify your identity, income and employment.
4. Sign your loan agreement
If all the information you supplied checks out, your requested loan may be approved. Within a few days, the amount you’re borrowing will be deposited in your bank account. The exact timing depends on your investor and peer-to-peer lending company.
What fees come with peer-to-peer loans?
The most common type of fees associated with peer-to-peer loans is origination fee. This administrative fee is typically taken out of your total loan balance. Origination fees generally range between 1% and 8% of your total loan.
You may also be subject to late fees if you do not make your monthly payment on time. Missing payments can also cause your credit score to drop if you’re more than 30 days late.
How can you use a peer-to-peer loan?
How you can use your loan varies depending on the peer-to-peer platform you use. Typically, companies will outline how you can and cannot use a peer-to-peer loan.
While the purposes of these loans are often flexible, it’s wise to research ahead of time to make sure your intent for your loan aligns with the company’s policies. For instance, some companies may not allow you to borrow money for postsecondary education.
Peer-to-peer lending pros and cons
While peer-to-peer loans may prove beneficial for some consumers, it’s not a one-size-fits-all form of credit that will work for everyone.
May have easier time getting approved for a peer-to-peer loan versus a loan with a traditional bank if you have a low credit score or thin credit history
Flexibility with loan use that traditional lenders may not offer, including for business use
Can repay your peer-to-peer loan early without incurring a prepayment penalty, similar to traditional personal loans
May take longer to get approval and receive your funds since the platform must first approve you and then find an investor willing to fund your loan
Such loans offered by very few trustworthy lenders
May not be available in some areas because they don’t have legislation that supports peer-to-peer lending
Where to find peer-to-peer loans
If you’re interested in going with a peer-to-peer loan, you may have a difficult time nailing down a reputable platform.
Peer-to-peer lending availability has rolled back in recent years, with companies such as Peerform no longer accepting loan applications and LendingClub ending its peer-to-peer loans in 2020.
Prosper is one of the few true peer-to-peer lending platforms left, offering loans funded by individual and commercial investors.
Alternatives to peer-to-peer loans
If you don’t qualify for peer-to-peer lending or you don’t think it’s right for you, you still have plenty of options when it comes to getting some credit. A few popular choices include the following:
Traditional personal loans
Instead of getting a peer-to-peer loan, consider looking into a traditional personal loan. You can get a personal loan through a bank, credit union or online lender, and you’ll likely need a robust credit profile to qualify for low interest rates.
Personal loans can be secured or unsecured, though most personal loans are unsecured, meaning no collateral is required. Personal loans have fixed interest rates and are offered in the form of lump sums.
Small business loans
If you’re looking to grow your business and need the capital to do it, you may want to look into small business loans available from banks or investors.
Small business loans are much larger than personal loans, with some lenders offering as much as $10,000,000. The application process for these types of loans, however, can be much more intensive as you may need to provide documentation for your business.
Home equity loans or lines of credit
If you own a home and have equity, you may be able to transform it into cash that you borrow against the property. To do this, you can take out a home equity loan or line of credit.
A home equity loan — also known as a second mortgage — is a loan secured by your home with fixed interest rates and a repayment period that ranges from five to 15 years. Typically, you can borrow up to 85% of your home’s value and receive your loan as a lump sum.
A home equity line of credit (HELOC), on the other hand, works similarly to a credit card. Instead of receiving a lump sum, you’ll have access to a revolving line of credit that you pull from as needed, and you only have to pay interest on what you borrow. These types of credit also often come with variable interest rates. Like a home equity loan, however, a HELOC requires that your home serve as collateral.
If you need access to quick funding, a credit card may be a good alternative to peer-to-peer lending.
If you have a good credit score, you may qualify for a 0% intro APR card. This means a credit card company may offer you an introductory period where you won’t have to pay interest on the amount borrowed. However, after that period is over, you’ll have to pay interest on the remaining balance.
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 and may make it difficult to qualify for credit in the future.
Frequently asked questions
Whether a peer-to-peer loan is safe depends on the type of company you use. Before committing to a loan, it’s important to research the company you plan to use to make sure it’s trustworthy. Be sure to check for complaints and regulatory actions with the Consumer Financial Protection Bureau.
You can also check sites such as the Better Business Bureau and Trustpilot to see what other consumers are saying about these companies.
Qualifying for a personal loan will depend on the peer-to-peer lending platform. Criteria may include credit score, income, residency and credit history. Generally, you’ll want to have a credit score of at least 640 to qualify for a loan with reasonable rates.
Yes. To become an investor, you’ll need to open an account with a peer-to-peer lending platform, like Prosper. After that, you can choose potential borrowers to whom you want to offer loans and then track your earnings.
Some lending platforms assign grades to consumers; as an investor, you can choose whether you want to provide funding based on that score.