If you need a personal loan, you might think a bank or credit union are your only options. But these sources may have high minimum credit score or income requirements, making it harder to get a loan if you have a low credit score or limited credit history.
Peer-to-peer lending offers an alternative to traditional loan sourcing that can be a good option for both good and bad credit borrowers alike. A relatively new form of lending, online peer-to-peer platforms help aspiring borrowers connect with investors who can provide personal loans without going through a bank or credit union.
What is peer-to-peer lending?
Peer-to-peer lending is sometimes referred to by different names, including marketplace lending, P2P lending, and crowdfunding. It’s important to note that there is a distinction: Marketplace lending typically refers to platforms that offer both peer-to-peer lending and online lending via financial institutions.
Crowdfunding often refers to a method in which a single party receives individual investments from multiple parties. In some contexts, these “borrowers” aren’t required to repay the loan in full, but instead, commit to other forms of repayment if their funding goal is met.
In the context of an individual or small business seeking out a personal loan through a non-bank source, peer-to-peer loans are available in various amounts, with some lenders offering from $1,000 to $25,000 or more.
How peer-to-peer lending works
Every peer-to-peer lender has a unique process for first-time users, though most potential borrowers should follow these general steps:
- Gather relevant information. First, gather your credit information. You’ll also need to provide the exact amount you wish to borrow, as well as how you plan on spending the money.
- Research P2P lending platforms. With many new and established P2P lenders in the marketplace, it’s important to do your research to find a platform that you feel comfortable and confident using.
- Select a platform, see if you can get prequalified, and apply for the loan. Once you find a platform you want to use, you’ll need to register as a user. As a user, you’ll be able to apply for your loan amount and the platform will match you with a suitable lender. You may be able to prequalify through the platform before applying for the loan to improve your chances of lender acceptance.
- Wait for approval and funding. After you apply, wait for the lender’s approval. If approved, it will detail how much the lender is willing to invest and the terms of the loan. If you agree, the loan will be distributed according to the platform’s terms.
How to lend money with peer-to-peer lending
Similar to borrowing money, each platform will have a specific process for lenders who wish to invest. The general steps you may need to take to lend include:
- Create an account on the P2P platform you feel comfortable and confident using.
- Set the interest rate range that you’ll agree to from prospective borrowers.
- Deposit the money you wish to lend and determine a fixed term in which that money is available to borrowers.
- Receive your repayments as you lend money according to the agreed-upon terms.
Where can I get a peer-to-peer loan?
One advantage to peer-to-peer lending is that you don’t need to leave your house to find a lender. Simply go online and choose the platform that’s right for you. As with any financial decision, it’s important to gain as much information as possible before choosing a platform and lender.
Make sure you’re reading customer reviews and researching the history of the platform. It’s crucial to identify all costs, rules, and responsibilities that both borrowers and lenders assume when using the platform and entering into a loan agreement. The largest peer-to-peer lender is:
- Prosper: Prosper was founded in 2005 and offers personal loans between $2,000 and $50,000 at fixed rates and fixed terms. It offers loans with APRs as low as 6.99% for debt consolidation, vehicle purchases, household expenses, home improvement, health care financing, and other needs, except for post-secondary education.
Before you decide on a P2P loan, compare rates and terms to personal loans through traditional and online lenders.
All APRs reflect autopay and loyalty discounts where available | LightStream disclosure | SoFi Disclosures | Read more about Rates and Terms
Is it safe to use peer-to-peer lending?
There are risks associated with all loan transactions, though many risks can be mitigated when securing a loan through a traditional financial institution. This is in part because of the regulations that banks and credit unions must follow.
Because peer-to-peer lending regulations aren’t as comprehensive, and because transaction structures may differ from P2P platform to platform, lenders and borrowers may encounter multiple risk factors.
The risks for borrowers may include:
- Not getting fully funded. Because an investor can decide how much to invest, you might be given less than the amount you need, yet still be responsible for repaying it according to the terms.
- Unnecessary hard credit checks. You’ll likely have to undergo a hard credit check, which may lower your credit score even if you’re denied.
The P2P industry is still evolving, which means certain risks may be elevated. To minimize the risk of falling for scams, you should first look to P2P platforms with a long history of lending, preferably those that also abide by federal or state regulations.
Make sure you only communicate via the platform as well, and do not share your personal account information through other modes of communication that aren’t verified with the platform.
The risks for lenders include:
- Loans are unsecured: Many platforms keep their borrower information restricted from the lender, which means a lender cannot directly pursue collection efforts. If the platform seeks collections, the borrower may be able to seek bankruptcy protection.
- Many loans are not guaranteed: Many of these loans lack FDIC insurance, as well as any state or federal agency guarantees.
Related: A Guide to High-Risk Loans
Pros and cons of using peer-to-peer lending
Because peer-to-peer lending is still a new practice without the same regulations as traditional lending, there are uncertainties about its advantages and risks for borrowers as well.
Marketplace lending may not have the same track record to analyze that traditional lending does, but the current outcomes of this service have identified certain pros and cons that all potential borrowers should consider.
Pros
- Potentially lower interest rates: Because the loan lender is a private business or investor acting outside of a financial institution, they may be able to extend lower interest rates to certain borrowers depending on their requested amount and other relevant data.
- Potentially lower fees: Similar to interest rates, the lender offering the loan may have more freedom to dictate which fees they charge. For example, if a peer-to-peer platform helps facilitate loan applications and processing, the lender may charge a lower fee because of the reduced loan origination cost.
Cons
- Some platforms allow lenders to set interest rates: A lender may choose to set a higher-than-average interest rate. This could be a financial challenge for borrowers who cannot qualify for a bank loan and believes peer-to-peer lending is their only option.
- Small-business owners may need to provide their credit score: If the P2P platform cannot make loans directly to small businesses, the owner may need to provide their credit score, which could negatively impact their credit report.
What fees come with peer-to-peer lending?
Just as you should expect fees when borrowing from a brick-and-mortar or online financial institution, it’s likely that most peer-to-peer lending services will charge fees to the borrower. These may include origination fees, late payment fees, or even early payoff penalty fees.
Keep in mind that potential fees may vary from lender to lender or platform to platform. There’s also a chance that new fees will present themselves as peer-to-peer lending evolves in the industry. When comparing costs associated with peer-to-peer lending, make sure you’re looking at both the interest rates and all fees charged to determine which will come at the lowest expense to you.
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