Jessica Haymond

Peer-To-Peer Lending

Peer-to-peer (P2P) lenders are online platforms that match borrowers with individuals who want to invest their funds. Traditional financial institutions like banks and credit unions are not involved in the process. Instead, the P2P lender acts as the intermediary between those who require a loan and the individuals who are willing to lend their money.

P2P lending, which is also referred to as social lending or crowdlending, has grown in popularity over the last decade. According to data issued by Lending Club, one of the largest P2P platforms, loans totalling $31 billion have been made by the company since it started operations in 2006.

How It Works

Unlike banks, these firms do not have a brick and mortar business model. Instead, a prospective borrower would visit the P2P lender’s website and enter some basic personal information. The platform then retrieves the individual’s credit details from online sources.

Proprietary algorithms assess the creditworthiness of the loan applicant and match the borrower with prospective lenders. If the lender agrees to extend finance, funds are directly transferred to the borrower’s bank account.

The entire process is conducted online. This allows the P2P lender to keep its overhead low.

What is the interest rate that you can expect to pay if you borrow from an alternative lender? They vary widely. For example, Prosper, another large P2P platform, offers loans that have an annual percentage rate (APR) ranging from 5.99% to 35.99%.

Why is there such a wide variation in lending rates? A borrower with a poor credit score may have to be willing to pay higher rates. Loan rates will be based on a borrower’s credit score as well as the loan amount, the loan term, and the credit usage and repayment history.

Loans are usually made available for three- and five-year terms. Borrowers are also required to pay an origination fee that could range from 1% of the loan amount to 5%.

What Can You Use the Money For?

According to Lending Club, a large portion of the money that is borrowed from P2P lenders is used for debt consolidation. Individuals with high-cost credit card debt access money from an online lender and pay off their credit card balances.

However, P2P loans can be used for a wide range of other purposes as well. These include:

  • Home Improvement – the money that you borrow on an online platform can be used to replace your roof or buy new furniture.
  • Auto Loans – if the financing offered by the car company does not meet your requirements, you can opt for a loan sourced from a P2P platform.
  • Green Loans– are you planning to install solar panels or a water preservation system? You can raise money from an alternative lending platform.
  • Military Loans – armed forces personnel can borrow funds for family moving expenses, home improvements, vacations or even buying gifts.

Small Businesses Can Borrow

Several P2P lenders have specific financial products intended for small businesses. For example Funding Circle, a P2P lender that has its head office in London, offers loans to small businesses. These can range in value from $25,000 to $500,000.

A borrower who approaches Funding Circle must have a minimum personal credit score of 620. Additionally, the business for which finance is being sought must have been established at least two years ago. New businesses don’t qualify.

What is the rate of interest that your business can expect to pay to a lender through the Funding Circle platform? APRs can vary widely and range from 7.4% to 36%.

Lending Club also offers peer-to-peer business loans. The eligibility criteria are slightly different from that used by Funding Circle. The borrower’s business should have been in existence for a year. But it should have minimum revenues of at least $50,000. APRs range from 9.8% to 35.7% and the loan amount could be as low as $5,000. A business can borrow a maximum of $300,000.

Should You Borrow from a P2P Lender?

Banks and credit unions generally offer interest rates that are lower than those that are available on P2P platforms. If you have a good credit score, you have a better chance of being approved for a loan from a bank. Many experts would advise to approach a traditional financial institution for your loan requirement. The lower APRs may save you a significant amount over the years.

However, P2P lenders can be considered superior to banks in certain respects. For one, their credit approval cycle is usually much faster. As the entire process is conducted online, it is possible to get an approval in a matter of days or even hours. Banks can take much longer.

Additionally, P2P lenders consider applicants who have less-than-perfect credit scores. Although this may mean that the borrower will have to pay a higher interest rate, at least the finance will be available. Banks usually reject those who have low credit scores.

Ultimately, consider your financial situation and research various lenders (both traditional banks and online lenders) that might be available to you. If you are interested in peer-to-peer lending carry out a comparison of several online platforms. Select the lender that best meets your needs and finalize your loan only after you have completely understood the terms and conditions. You could be one of the millions of individuals to get a loan from a peer-to-peer lender!