Peer-to-Peer Lending: What Is It? Guide to Loans & Apps | finder.com (2024)

Peer-to-peer (P2P) lending — sometimes called social lending or crowd lending — allows borrowers to get a loan from other individuals, called investors. P2P lending takes place on an online financial platform, like Prosper, which acts as an intermediary by connecting qualified borrowers to investors looking to fund loans.

While P2P lending rates may be slightly higher than bank offers, these platforms aim to make loans more accessible by accepting credit scores as low as 600. From the borrower’s perspective, they work a lot like a direct online lender, and in fact, many P2P platforms like LendingClub eventually become direct lenders. The main difference is that almost all P2P lenders charge an origination fee, and there are fewer P2P platforms to compare.

How peer-to-peer lending works

Peer-to-peer lending works a lot like any other personal loan. Most borrowers will follow a version of these steps to get a P2P loan:

  1. Compare P2P lenders. Get started by comparing the APRs, origination fees, loan amounts and terms available through different P2P platforms. Also, check the requirements to make sure you’re eligible.
  2. Check your rates. Fill out an application on the P2P platform’s website to see which rates and terms may be available to you. Do this with your top choices — it only takes a few minutes and is based on a soft credit pull that doesn’t affect your credit score.
  3. Apply for a loan. If you decide to apply for a loan, you’ll need to fill out a full application and upload any required documentation. This step requires a hard credit pull that will show up on your report.
  4. Get approved. After submitting your application and documentation, the lender will review your information and verify it for accuracy. It will also assign you a letter grade based on credit risk, which determines the rates, fees and terms you receive.
  5. Wait for investors to fund the loan. While your application is being processed, investors select loans to fund based on the letter grade. Lower letter grades have a higher risk but higher returns.
  6. Get your funds. Once an investor funds your loan, the platform transfers the funds to your bank account. Typically, this takes one to five business days.

After receiving the funds, you’ll repay the loan in monthly installments and the investor collects on interest. The platform receives the origination fee and may also collect on some of the interest the investor doesn’t receive.

P2P loan rates, fees and terms

Peer-to-peer loans have similar rates and terms as many online loans. However, unlike some online lenders, P2P lenders almost always charge an origination fee.

Here are the general rates, fees and terms on P2P loans:

  • Rates. Rates on P2P loans typically range from 6% APR for the best credit borrowers up to 36% APR for lower credit borrowers.
  • Origination fees. P2P lending platforms almost always charge an origination fee — typically between 1% and 8%. This is how P2P platforms make money, since the investor collects some or all of the interest charged.
  • Terms. A typical P2P loan repayment term is between two and five years, depending on the loan amount.

It’s worth noting that not every P2P lender charges rates and fees. For example, the short-term P2P lending app SoLo Funds asks for a tip instead of charging interest or fees, similar to a cash advance app like Earnin.

How to qualify for a peer-to-peer loan

P2P platforms have similar requirements to other online lenders like Upstart and OneMain Financial. Both are designed to serve borrowers who can’t qualify for a traditional bank loan.

These are the minimum requirements at the popular P2P lending platform Prosper. While Prosper’s requirements are typical for a peer-to-peer platform, they may not be exactly the same across lenders:

  • Credit score of 600 or higher
  • US citizen with a Social Security number
  • Over 18
  • No recent bankruptcies

These lower requirements mean that peer-to-peer lending for bad credit borrowers may be available. However, most require a credit score above 600 — which Finder considers a fair credit score.

Maintaining good credit requires diligence

Paying close to your credit is one of the best ways to make sure you’re on the right track to excellent credit but for roughly one in five (20%) it’s been six months or more since they checked their credit.

How P2P business loans work

P2P lending is also available for business owners from select lenders. The difference between P2P business loans and personal P2P loans is that you need to qualify as a business owner.

The general requirements for a P2P business loan may include:

  • At least two years in business
  • Annual revenue of $50,000 or higher
  • Personal credit score 660 or higher

FundingCircle is one highly-rated P2P lender that offers business loans. Many users on Trustpilot report smooth application processes and fast funding.

Pros of P2P lending

There are several advantages to using a P2P platform to take out a loan.

  • Flexible requirements make peer-to-peer platforms a great alternative to bank loans if you’ve struggled to qualify for financing in the past.
  • Many platforms offer multiple types of financing, such as personal and business loans.
  • Most have no prepayment penalties, meaning you can save on interest by repaying the loan early.
  • Automated underwriting makes P2P platforms faster than a bank or credit union — though the turnaround is slightly longer than most online lenders.
  • Lower interest rates than credit cards make this an inexpensive financing option for borrowers with fair credit scores above 600.

Cons of P2P lending

Consider these drawbacks before you consider getting a peer-funded loan:

  • Origination fees are standard for peer-funded loans, which can result in a higher APRs and upfront cost than a direct lender.
  • There are only a handful of P2P platforms out there — and many become direct lenders after establishing their lending business.
  • It may take longer to receive your funds than a direct online lender, since you have to wait for investors to fund your loan.

Alternatives to peer-to-peer lending

P2P lending has advantages, but it’s not your only option to access cash. Since there are only a few P2P lenders out there, considering these alternatives alongside peer-funding platforms can help you find the most competitive offer available to you.

  • Direct online lenders offer automated personal loans with a faster turnaround than a P2P lenders. There are more bad credit options through direct lenders and many offer lower APRs and no origination fee to borrowers with credit scores over 670.
  • Big banks like U.S. Bank and PNC Bank also offer personal loans, but you may need to meet stricter criteria than with an online lender and turnaround times may be longer if you’re a new customer — think weeks.
  • Local banks and credit unions tend to have more flexible credit requirements than big banks and can offer more favorable rates and terms.
  • Lending circles are groups of individuals that pool money to fund loans for each member, letting you access small-dollar, lost-cost loans from other members when you need cash.
  • Cash advance apps offer small-dollar advances on wages you’ve already earned $20 and $250 – either for a monthly fee or a suggested tip.

If P2P lending doesn’t sound like the right fit for you, browse our picks for the best personal loans to explore all your options.

Compare P2P alternatives

Use our table to compare these online lenders, and then select Learn more to visit the lender’s site or More info to read our review.

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Investing in P2P lending

P2P lending offers investors a way to earn a return on their investment. To get started, choose a lending platform, open an account and deposit your funds. The more you invest, the higher your potential return – but since invested funds aren’t insured, you could lose your money if the borrower defaults or the platform goes out of business.

However, you can start small. Prosper, for example, allows you to invest as little as $25. It lets you choose the loans you want to fund so you can reduce your risk.

If you want to get in on some P2P lending action as an investor, here are some things to note:

  • Investors often paid monthly. Investors can be paid each month as the borrowers make their monthly payments.
  • You can choose what you fund. With P2P lending, you get to choose what loans you fund. Many P2P lending sites assign letter grades for borrowers, which can help mitigate your risk.
  • Income requirements may apply. Being a millionaire isn’t usually a requirement. Depending on the P2P platform, an annual gross salary of at least $70,000 may be sufficient, or you must have a specific net worth.
  • Investment caps may apply. Some platforms restrict how much you can invest, such as LendingClub, which caps investments at 10% of your net worth.
  • Not FDIC protected. With P2P lending, investors won’t be reimbursed if the borrower defaults on your loan investment or the P2P lending site you’re using goes out of business or fails.

Dive deeper How to start investing: Learn about all of your options

Introduction

I am an expert in peer-to-peer (P2P) lending, with a deep understanding of how it works and its various aspects. I have extensive knowledge of the concepts and processes involved in P2P lending, which I will share with you in this response.

Peer-to-Peer (P2P) Lending Overview

Peer-to-peer lending, also known as social lending or crowd lending, allows borrowers to obtain loans directly from individual investors through online financial platforms. These platforms, such as Prosper and LendingClub, act as intermediaries, connecting borrowers and investors.

P2P lending platforms aim to make loans more accessible by accepting credit scores as low as 600. While the interest rates offered by P2P lenders may be slightly higher than those offered by traditional banks, they provide an alternative financing option for individuals who may not qualify for bank loans.

How P2P Lending Works

The process of obtaining a P2P loan typically involves the following steps:

  1. Compare P2P lenders: Start by comparing different P2P platforms based on factors such as APRs, origination fees, loan amounts, and terms.

  2. Check your rates: Fill out an application on the P2P platform's website to see the rates and terms available to you. This process usually involves a soft credit pull that doesn't impact your credit score.

  3. Apply for a loan: If you decide to proceed, complete a full application and submit any required documentation. This step involves a hard credit pull that will be recorded on your credit report.

  4. Get approved: The lender will review your application, verify the information provided, and assign you a letter grade based on your credit risk. This grade determines the rates, fees, and terms you receive.

  5. Wait for investors to fund the loan: While your application is being processed, investors on the platform select loans to fund based on the assigned letter grade. Lower letter grades may carry higher risk but offer higher returns for investors.

  6. Receive funds: Once investors fund your loan, the platform transfers the funds to your bank account, typically within one to five business days.

  7. Repay the loan: You will repay the loan in monthly installments, and the investor collects the interest. The platform receives the origination fee and may also collect a portion of the interest.

P2P Loan Rates, Fees, and Terms

P2P loans generally have rates, fees, and terms similar to many online loans. Here are some key points to consider:

  • Rates: P2P loan rates typically range from 6% APR for borrowers with excellent credit to 36% APR for those with lower credit scores.
  • Origination fees: P2P lending platforms usually charge an origination fee, typically between 1% and 8% of the loan amount. This fee allows the platform to generate revenue, as investors collect a portion of the interest charged.
  • Terms: The repayment term for a P2P loan is typically between two and five years, depending on the loan amount.

It's important to note that not all P2P lenders charge rates and fees. Some platforms, like SoLo Funds, operate on a different model and ask for a tip instead of charging interest or fees.

Qualifying for a Peer-to-Peer Loan

To qualify for a P2P loan, you generally need to meet certain requirements set by the platform. While these requirements may vary slightly among lenders, here are some common criteria:

  • Credit score of 600 or higher
  • US citizen with a Social Security number
  • Over 18 years old
  • No recent bankruptcies

These lower requirements make P2P lending an option for borrowers with fair credit scores. However, it's worth noting that most platforms still require a credit score above 600.

P2P Lending for Business Owners

P2P lending is not limited to personal loans; it is also available for business owners through select lenders. Here are some general requirements for a P2P business loan:

  • At least two years in business
  • Annual revenue of $50,000 or higher
  • Personal credit score of 660 or higher

Platforms like FundingCircle offer P2P business loans and have received positive reviews for their application processes and fast funding.

Pros and Cons of P2P Lending

Before considering a P2P loan, it's important to weigh the advantages and disadvantages:

Pros:

  • Flexible requirements compared to traditional bank loans
  • Multiple types of financing available, including personal and business loans
  • No prepayment penalties, allowing borrowers to save on interest by repaying the loan early
  • Faster process compared to banks or credit unions
  • Lower interest rates than credit cards for borrowers with fair credit scores

Cons:

  • Origination fees are standard for P2P loans, potentially resulting in higher APRs and upfront costs compared to direct lenders
  • Limited number of P2P platforms available, as many transition to becoming direct lenders
  • Longer wait times to receive funds compared to direct online lenders, as investors need to fund the loan

Alternatives to P2P Lending

If P2P lending doesn't meet your needs, there are alternative options to consider:

  • Direct online lenders: These lenders offer automated personal loans with faster turnaround times than P2P lenders. They often provide more options for borrowers with bad credit and may offer lower APRs and no origination fees for borrowers with credit scores above 670.
  • Big banks: Major banks like U.S. Bank and PNC Bank also offer personal loans, but they may have stricter criteria and longer turnaround times, especially for new customers.
  • Local banks and credit unions: These institutions often have more flexible credit requirements and can offer favorable rates and terms.
  • Lending circles: Lending circles involve groups of individuals pooling money to fund loans for each member, providing access to small-dollar, low-cost loans.
  • Cash advance apps: These apps offer small-dollar advances on wages already earned, typically with a monthly fee or suggested tip.

Investing in P2P Lending

P2P lending also offers an opportunity for investors to earn a return on their investment. Here are some key points to consider:

  • Investors are often paid monthly as borrowers make their monthly payments.
  • Investors can choose which loans to fund based on the assigned letter grades for borrowers, helping to mitigate risk.
  • Some platforms may have income requirements or investment caps.
  • P2P lending investments are not FDIC protected, meaning investors may not be reimbursed if borrowers default or if the platform goes out of business.

Starting small and choosing reputable platforms like Prosper can help reduce risk for investors.

Conclusion

Peer-to-peer lending provides an alternative financing option for borrowers who may not qualify for traditional bank loans. It offers flexible requirements, multiple financing options, and the potential for lower interest rates. However, borrowers should consider the origination fees and longer wait times for funds. It's important to compare P2P lenders with other alternatives to find the best fit for your needs. Similarly, investors should carefully assess the risks and rewards of P2P lending before investing their funds.

Peer-to-Peer Lending: What Is It? Guide to Loans & Apps | finder.com (2024)

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