What is Peer-to-Peer Lending?
Thanks to how low interest rates have dropped in some industries and areas of the country, it’s becoming increasingly common for borrowers to seek out new personal loans at lower rates as a way to supercharge their debt paydown plan. After all, why pay more in interest over the life of your debts if you can find lending platforms that make debt consolidation easier than ever thanks to easier application processes and lower monthly payments than traditional banks and financial institutions?
What is peer-to-peer lending?
When it comes to lending sites, there are a wide variety of online lenders out there. One type of lending company that’s become more popular over the past few years is peer lenders. Peer-to-peer lending companies (also known as P2P lending platforms) offer unsecured peer loans from individuals to other individuals rather than through large, traditional lenders.
From a lack of prepayment penalties to smaller amounts for the minimum loan you can take out and even more relaxed credit score or credit history requirements, there are a lot of benefits to choosing P2P lending platforms over other types of loans. If you’re considering different personal loan options, here’s what you need to know about P2P lending.
How do peer-to-peer lending platforms work for borrowers?
When it comes to getting P2P loans as a borrower, the process is relatively straightforward. A specific P2P lending platform acts as a middleman between you and individual investors or lenders who are willing to offer you a loan.
While your credit report will ultimately impact your loan terms, you can check your eligibility for different loan amounts by filling out a quick form online about your income, credit score, and the amount you’re interested in borrowing. From there, you can usually get approved and receive your loan in as little as one day once you’ve accepted the loan terms and conditions.
What do you need to apply for a P2P loan?
Aside from sharing information about how you intend to use the loan (for example, you may be looking to use your P2P loan to make home renovations or pay off debt), you’ll need to provide some personal and financial information before you can qualify for a loan, too.
Most P2P platforms will only lend to borrowers who are 18 years of age or older and you may need to supply a photo of your driver’s license or another photo ID in order to confirm your identity. Banking statements or paystubs that prove your wages may also be required to verify that you meet certain income thresholds, particularly for higher loan amounts. When you submit these documents and materials to a P2P lender, they’ll also run a credit check on you in order to get an even fuller perspective of your finances.
How do P2P loans differ from traditional lenders?
Unlike traditional financial institutions, applying for a P2P loan is a much quicker process and may offer more competitive terms and rates. Since you are vying for a loan from an individual, interest rates are generally much better through P2P lending platforms than banks.
One major benefit of seeking out P2P loans is that it’s likely you can find a company that meets your specific needs—even if you have poor credit or minimal credit history. Banks have far more guidelines and hoops to jump through in order to get a loan, whereas the terms and requirements from one P2P lender to another could be much more lenient in some areas. As such, if you’re only looking for a loan for a small amount of money and don’t mind paying an origination fee, a P2P loan can be a major help.
How do peer-to-peer lending platforms work for investors/lenders?
While many borrowers flock to P2P websites as a way to get better rates on their loans when refinancing, there’s also money to be made by individual investors interested in helping fund P2P loans.
As an investor, you’re able to take a look at different borrower profiles before deciding whether or not you’re willing to make an investment. This allows you to avoid some of the risks of a borrower with worse credit history who may be more likely to default on your loan. When it comes to making money off of your loan, as the borrower makes repayments, you’ll receive interest on the money you lent.
Not only does this allow you to grow your money at a higher rate than traditional high-yield savings accounts, but it may also give you the warm feeling that comes with helping someone less fortunate than you. Just because someone has bad credit doesn’t mean that they should be refused the money they need to start a small business and change their trajectory, and having a hand in that sort of financial impact can be very fulfilling for investors.
Different platforms have different restrictions and guidelines for how to qualify to lend through their service, so make sure to do some research before deciding to start lending money to others online.
How do P2P loans differ from other types of investments?
If you’re looking for a short-term way to grow your money, investing in P2P loans can be a worthwhile endeavor. This is because many investors find they get returns between 7% and even 11% or 12% lending through various peer-to-peer platforms. Obviously, this is much better than the rates offered by high-yield savings accounts — and even on par if not better than the average return in the stock market.
Of course, since you’re granting an unsecured loan to a borrower, there’s always a chance that they won’t fully repay your loan. This makes P2P lending a bit riskier than other forms of investing; however, it can really pay off if you find a good borrower. You’ll be able to evaluate loans based on different grades or rankings that serve as a snapshot of a borrower’s credit, loan terms, the amount they’re asking to borrow and why, and their income and debt-to-income ratio.
One thing to know about investing in P2P loans is that you don’t need to fully fund the loan in order to invest. For example, if somebody asks for a loan of $10,000 to buy a used car, you can decide to only fund a portion of that loan. In this way, you can spread your investment across a variety of borrowers, helping to mitigate some of the risks of going all-in on one single borrower.
What do you need to invest in P2P loans?
Thanks to P2P platforms, it’s easy to get started investing in peer-to-peer loans. Most online platforms offer all of the managerial tools and underwriting for the loans so that all you have to do is evaluate your options and pick a loan that seems good to you. The P2P platform will collect payments on a monthly basis and distribute your payment to you without you having to worry about administering the terms of the loan by yourself.
As such, all you really need to invest in P2P loans is a bank account and a few minutes to get your investor account set up. Since many peer-to-peer lending platforms allow you to invest in loans in smaller increments of $25 or $50, you can even get started with minimal assets. Some lenders, such as Prosper, even offer automated options for distributing your investment across different loans in order to meet specific goals, netting most investors an average return of 5% in the process.
What are some peer-to-peer lending companies?
Now that you have an understanding of how peer-to-peer lending works, it’s a good idea to take a look at some of the top P2P lenders. When it comes to P2P lending platforms, there are some differences between each option depending on terms related to underwriting, origination fees, and creditworthiness. Here’s a quick overview of some of the most popular P2P lenders online.
Lending Club was one of the first P2P platforms online. You can qualify for loans as small as $1,000 and as large as $40,000 through Lending Club which can be used for a wide range of purposes, whether it’s for refinancing your car loan or covering a renovation in your home. Depending on your FICO score and other credit factors, you may qualify for APR anywhere from 8.05% to 35.89%.
One of the best features of Prosper is how quickly they can get you money. Prosper offers fixed-rate loans for three or five years with next-day funding possible. Just like Lending Club, the maximum amount of a personal loan you can receive through Prosper is $40,000; however, their minimum loan amount is $2,000. This means that for smaller projects, you may need to choose a different lender, but with annual percentage rates ranging from 7.95% to 35.99%, you may qualify for a slightly better rate if you don’t have bad credit and your debt-to-income ratio is low.
Peerform has some of the lowest annual percentage rates of any of the peer-to-peer lenders on this list, which APR ranging from 5.99 % to 29.99%. One of the best things about using Peerform for your personal loan is that in addition to low APRs, you’ll also get a transparent pricing structure when you take out your loan with them. This means that you won’t be surprised by a loan origination fee or any other costs associated with your loan, helping you know exactly what to expect as you pay it off.
While the transparency of Peerform is a major selling point, you’re a bit more limited in terms of how much you can borrow through the platform. Minimum loan amounts through Peerform must be at least $4,000 with loans maxing out at $25,000.
For individual investors, it’s important to note that you must be an accredited investor in order to lend through Peerform. This means that you already have a net worth of at least $1M across all of your assets or have made $200,000 a year for at least the past two years.
Of all the peer-to-peer lenders on this list, if you’re not looking for money to start a small business, Upstart will loan you the most. Minimum personal loans through Upstart start at just $1,000, with the maximum amount you may qualify for through Upstart topping out at $50,000. Upstart does have higher APRs on average — even on the low end of loans—with ranges landing somewhere between 8.27% and 35.99%.
Another major benefit of Upstart is its use of Artificial Intelligence (AI) technology to gain deeper insight into a borrower’s profile. Going beyond a traditional credit score, Upstart’s loan approval process ultimately means that about 25% more applicants get approved for financing through Upstart than they would through some of the other P2P lenders out there.
If you’re an entrepreneur or dream of starting your own business, it’s definitely a good idea to look into Funding Circle. Funding Circle is exclusively intended to be used for small business loans, and, as such, borrowers can get as much as $500,000 through Funding Circle — as long as they’ve been in business for at least three years. Obviously, this kind of money can make a big difference in anyone’s plans to get their business up and off the ground, and with APR ranging from 12.18% to 30.12%, you may get better financing through Funding Circle than other options.
Just like Peerform, Funding Circle only allows individual investors who qualify as accredited investors.
Payoff’s main focus is helping consumers get out of debt, so if you’re looking into a personal loan for debt consolidation, Payoff is definitely worth considering. In the interest of promoting financial wellness, Payoff eschews late fees and offers borrowers a single, easy-to-manage monthly payment at lower interest rates than they may otherwise have with creditors. With APR ranging from 5.99% to 24.99% and loan origination fees under 5% depending on your credit, it’s highly likely that you can cut your interest rate in half by switching to a Payoff peer loan.
Kiva is a P2P lending platform specifically focused on helping others through microloans. As such, loans are offered for as little as $25 for a wide variety of causes and reasons. Kiva is all about sharing your wealth in a positive manner by paying it forward. Unlike crowdfunding platforms like IndieGoGo or Kickstarter, Kiva allows you to lend money and get that money backed, with less than 4% of borrowers defaulting on their loan. If you’re interested in social good as an investor or need a small loan under the minimum offered by other platforms, Kiva may be an ideal option for your goals or needs.
Just like Funding Circle, StreetShares is specifically aimed at borrowers interested in funding their small business’ needs. With APRs as low as 8%, StreetShares can be a great option for entrepreneurs who just need some seed money to get their business idea launched. One thing to note about StreetShares is that you must repay your loan on a weekly basis; however, if you have steady income from your company, this may not be an issue. Loans for StreetShares max out at $200,000, so as long as your business doesn’t mean more than that, it may make sense to go with their platform instead of Funding Circle.
The bottom line
Ultimately, there are a lot of different factors you’ll want to weigh when considering whether or not to get into peer-to-peer lending. Some companies specifically focus on catering to specific needs or goals like small business loans or debt consolidation, while others are much broader in how they expect their personal loans to be used.
As an investor, getting involved with peer-to-peer lending companies gives you a way to get higher-than-average returns compared to traditional savings accounts while helping others at the same time. While there is some inherent risk involved in offering unsecured loans to different borrowers, by spreading your investment across several borrower profiles, you can limit some of the inherent risks of investing in P2P loans. This makes P2P loans a worthwhile consideration for diversifying your portfolio in the short-term.
For borrowers, P2P loans are generally much more competitive in terms of interest rates than bigger financial institutions. Depending on your credit, you may be forced into picking between a few different P2P lending platforms; however, because getting an estimate about your loan terms won’t hurt your credit, it’s a good idea to compare at least two or three options that seem like they’ll best address your needs. When it comes to finding success in the world of personal finance, research and information is your greatest asset, so be sure to do your homework and you’re bound to set yourself up well using a P2P loan as a borrower or investor.