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Peer-To-Peer Lending 101: Everything You Need To Know

peer-to-peer lending

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Peer-to-Peer lending is a form of borrowing that uses a network of investors instead of a traditional lender. With P2P lending, borrowers are connected with a group of people (peers) or a company who then decide whether or not to fund the loan. The eligibility requirements for P2P loans are often not as stringent as traditional loans, making it a great option for those who may not qualify for other forms of credit.

Before you take out a peer-to-peer loan, it’s important to weigh the pros and cons to see if it’s the right financial decision based on your circumstances. P2P lenders typically have lower credit score requirements than traditional banks, so you may be able to qualify with a score as low as 600.

What is peer-to-peer lending?

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Peer-to-Peer lending is an innovative way to get the financing you need, by connecting investors directly with borrowers. With traditional personal loans, the money comes from banks, credit unions, or online lenders. But with P2P lending, the funds come from individuals or companies who invest in your loan. This new form of lending offers many benefits, including lower interest rates and more flexible repayment terms.

How does peer-to-peer lending work?

Peer-to-peer loans are a great way to get the money you need quickly and easily. Here’s how it works:

  • Prequalification: You may be eligible for a peer-to-peer loan through our prequalification process. Successful applicants will be given an estimate of the loan terms and annual percentage rate (APR) after submitting a formal application.
  • Application: Applying for a loan can be a great way to get the financial assistance you need. However, it’s important to understand that when you apply for a loan, the lender will likely perform a hard credit check.
  • Approval: Now that you’ve applied for a loan, it’s time to wait for a lender to approve it.
  • Funding: Your loan application will be reviewed by multiple investors. Depending on how much you want to borrow, some or all of the investors may agree to provide funding for your loan.
  • Electronic transfer of funds: Your loan will be funded by investors and you will receive your money via electronic transfer. In some cases, you may have access to your funds in as little as one business day.
  • Loan payments: As you approach the end of your loan term, you’ll need to start making fixed monthly payments that will be disbursed to all the investors involved in your loan.

Key takeaway: To get the best deal on a peer-to-peer loan, it’s important to prequalify with multiple lenders. By doing this, you’ll be able to compare rates and terms to find the loan that’s right for you.

Does peer-to-peer lending involve any fees?

Peer-to-peer lending typically involves an origination fee, which can be up to eight percent of your loan amount. This fee may be charged upfront or taken out of your total loan amount. You may also be charged late fees for missed payments. Other fees will vary depending on which lender you use.

Key takeaway: P2P loans can be a great way to get the money you need, but it’s important to understand the fees involved. An origination fee can reduce your loan amount, so make sure you know what you’re paying.

What if I want to lend money?

Peer-to-peer lending platforms offer investors the opportunity to lend money and earn interest on their investments. These platforms provide borrowers with access to funding that they may not be able to obtain through traditional channels. There is some risk involved in lending money, but peer-to-peer lending platforms typically offer tools and resources to help investors make informed decisions. Loan repayment is typically tracked through the investor’s account on the platform.

Is peer-to-peer lending safe?

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Borrowing from a traditional bank or online lender can be nerve-wracking. However, with a platform like P2P lending, investors take on the most risk. If a borrower defaults on their loan, the chances of getting your money back as an investor are slim. 

When it comes to security, P2P lending platforms take the same precautions to safeguard your information as any other financial institution would.

What uses does peer-to-peer lending have?

Peer-to-peer loans are a type of unsecured personal loan. You can use them for almost any legal purpose, such as consolidating debt, paying for a large purchase, or funding a home improvement project.

  • Automobile purchase
  • Debt consolidation
  • Fertility treatment
  • Home Improvement
  • Major expenses like medical bills or a car repair
  • Moving expenses
  • Small-business loans for starting or growing a business.
  • Fertility treatment.

Different loans have different restrictions. For example, many won’t allow you to use the money for gambling. Additionally, others may prohibit using funds for investing in stocks or any form of pure financial investing or direct sales schemes.

Where to get a P2P loan

P2P lending platforms have become increasingly popular in recent years. Here are some of the most popular P2P platforms available to help jumpstart your search:

  • Funding Circle: Small business loans can be difficult to come by, but with Funding Circle, borrowers can connect with a network of investors to get the financing they need.
  • Kiva: Kiva is a unique organization that allows borrowers to connect with lenders to fund their small businesses. Kiva does not use a borrower’s credit score as a key factor, but rather requires them to get a certain number of people to send money through the platform. Once the threshold is met, the loan becomes available for public funding.
  • Prosper: Prosper is a peer-to-peer lending platform that offers personal loans to qualified borrowers. It was established in 2005 and is headquartered in the United States. Prosper offers loans ranging from $2,000 to $40,000 and charges origination fees of 2.41 percent to 5 percent.

Pros and cons of peer-to-peer lending

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Taking out a personal loan can be a great way to get the money you need, but there are some things you should know before you decide to go this route.

Pros

  • Fair credit allowed: There are now many peer-to-peer marketplaces that allow borrowers to have credit scores as low as 600. So, even people with poor credit scores can get loans through these platforms. This is great news for anyone who has struggled in the past to get a loan because of their credit score.
  • Quick funding process: Applying for a loan online is quick and easy, and you can usually expect to receive your funds within a few days. However, some traditional banks and credit unions may take much longer to process your loan or may require you to apply in person.

Cons

  • You might have more fees: P2P lenders usually charge an origination fee, which can be 1-8% of your loan amount. Not all P2P lenders charge this fee, so it’s important to review all fees before applying.
  • You could have a higher interest rate: Peer-to-peer lending can be a great way to get the money you need, but it’s important to shop around for the best rates. Your credit score will affect your interest rate, so it’s a good idea to check your score before applying. Remember, the lower your score, the higher your interest rate will be.

Peer-to-peer lending vs. bank loans

Peer-to-peer loans and bank loans are two different ways of borrowing money. With a peer-to-peer loan, you’re borrowing from an individual or group of people, while with a bank loan, you’re borrowing from a financial institution.

One major difference between these two types of loans is who funds them. With a peer-to-peer loan, your money comes from other individuals, whereas with a bank loan, your funds come from a bank or credit union.

Another key difference between these two types of loans is interest rates. Many banks offer some of the lowest interest rates available, which can be enticing for borrowers with excellent credit. However, banks also tend to have stricter qualification requirements and longer funding timelines.

Loan amounts and repayment terms for both bank loans and peer-to-peer loans are similar.

Peer-to-peer LoansBank Loans
Funds from individuals or groups of peopleFunds from financial institutions
Flexible options for people with less credit historyMay require an in-person application
Flexible options for people with less credit historyStricter qualifications

Bottom line

When it comes to personal loans, peer-to-peer lenders offer a unique alternative to traditional financial institutions. Rather than working with a bank, peer-to-peer lending brings you directly in contact with potential investors who are willing to fund your loan. This can be a great option for those who are interested in exploring new borrowing opportunities.

However, it’s important to do your research and carefully review the fees and terms of any peer-to-peer loan before committing. By doing so, you can ensure that a peer-to-peer loan is the best choice for your specific financial circumstances.

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