Peer to Peer Lending

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.

How much you 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.

What it costs to borrow: The interest rate you’re offered depends largely on how good your credit is. For instance, you’ll find that LendingClub offers fixed rates that range from 5.99% to 35.89% APR. And our repayment period will typically be three to five years.

How 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. The origination fees for LendingClub, for instance, range from 1% to 6%. 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.

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. If you just squeak by the cut-off, 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? Hodges says Funding Circle does not work with businesses younger than two years old. “We are focused on serving established businesses that have assets and cash flow to secure loans and a legitimate plan for growth,” he said.
• 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. “We do not approve applicants from certain industries,” added Hodges, “like speculative real estate or gambling businesses.”

So what can you do if you’re denied or your loan isn’t funded? Check off each of these boxes:

1. Find out your credit score. 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 score online.
2. 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 one site, check out one or more other P2P lending sites. Be sure to review our tips below for choosing a reputable lender.

Alternatives to a P2P loan

If you don’t qualify for a peer-to-peer loan 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 understand all of your financial responsibilities before you sign on the dotted line.

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