Peer-to-Peer Lending

Two men exchanging money in peer to peer lendingFor peer-to-peer lenders, the Great Recession was manna from heaven. When banks clamped down on lending to all but their best-heeled customers after the 2008 global economic meltdown, fledgling peer-to-peer online loan sites rushed to meet consumer’s demands for credit and cash.

Barely over a decade into their existence, peer-to-peer lending sites are a go-to source for those willing to wander beyond the confines of conventional finance. The online lenders, often called P2P businesses, charge a fee to connect investors with ready customers, many seeking unsecured personal loans.

The industry’s rapid growth leveled off by mid-2017, when it had $32.8 billion in loans, but that was still about $7 billion more than 2015. Not bad for an industry that didn’t exist a dozen years earlier.

If you’re in the market for a loan, should you get in on the P2P action?

Each individual has different financial circumstances, but it’s definitely worth considering. Here is just about everything you need to know:

What are the basics?

Qualified P2P borrowers typically pay lower interest rates than banks advertise, while investors enjoy returns they might not earn elsewhere. The process amounts to a virtual environment of opportunity, in which people can borrow and lend on a more personal basis.

As this type of lending has evolved, the lending groups have become less restrictive, enabling more lenders and borrowers to participate. Borrowers receive the capital they need, while the lenders get a greater return on their money than they would if it sat stagnant in their personal accounts.

How do you qualify for a P2P loan?

It starts by completing an online application. Lenders use the information to check credit scores and qualify borrowers. They also consider the length and amount of a loan to determine interest rates.

Qualifying credit scores vary, but a credit score greater than 600 generally is required. As with other personal loans, the better one’s score, the more favorable the loan term should be.

Late payments are also costly, with sites charging $15 or more when payments are more than 15 days overdue.

People with bad credit will find Peer-to-peer lending generally more accessible. It is still a factor, but individual investors have much more leeway in setting qualifying standards than banks, credit unions of other traditional lending institutions.

The online application is similar to one you’d fill if you went to a bank for a loan. It gathers information on your employment history, income, Social Security number, etc. You will need documentation like:
  • Tax forms such as W-2s and 1099s
  • Tax returns
  • Recent bank statements
  • Pay stubs
  • Proof of income from alimony, child support, pensions, annuities, disability income or workers compensation
  • Copies of government-issued photo ID and utility bills.

Types of Peer-to-Peer Loans

P2P loans are generally up to $40,000, though some sites will go higher. There are three main types of P2P loans available.

Personal Loans

Borrowers use the loans to finance medical bills, automobile purchases and home improvements. They can also cover debt consolidation. These loans are often easier to get through social lending groups because they don’t carry the same restrictions as those from financial institutions.

Business Loans

These loans can cover start-up costs such as marketing, facility maintenance and repair or new-product launch expenses. Social lending groups are an attractive source for business loans because borrowers can present their loan proposals to multiple lenders, increasing their chances for approval.

Student/Educational Loans

These are typically lump-sum loans, which gives the borrower discretion on how to divvy up the money for school-related expenses. Although it is best to exhaust federal student aid options before considering alternative loans, social lending groups can offer competitive rates for student loans.

State Restrictions

Although peer-to-peer loans are often made across state lines, not all P2P platforms are available in all locales. For instance, Lending Club loans aren’t available in Iowa and Idaho. Prosper loans can’t be made to residents in Iowa, Maine and North Dakota. But options are available in all states except Iowa. Search the websites of major P2P lenders for details.

What P2P Lending Sites Are Popular?

Lending Club is the largest P2P.  It primarily makes personal loans of up to $35,000, though it also deals in business and medical loans that aren’t covered by insurance.

The loans are unsecured and set a fixed interest rate. Terms range from 24 months to 60 months, after which your debt is fully paid. Interest rates range from 5.24% APR to a high of 31.7% APR.

Lending Club charges an origination fee of between 1% and 5% of the loan amount. There are no application fees, and no prepayment penalties.

Prosper has been around since 2005 and loaned almost $12 billion. It has more than 2 million members and makes personal loans up to $35,000. The terms range from 36 to 60 months, with interest rates between 5.99% APR and 36.00%. The rates are fixed, and origination fees range from 1% to 5%.

SoFi stands for Social Finance and specializes in student loan refinancing, though it also provides personal loans and mortgages. Interest rates range from 3.5% to 7.49% on fixed rate loans and 2.13% and 5.68% on variable rate loans. Loan amounts go up to $100,000, and SoFi says a typical customer saves $14,000 by refinancing their student loans through the website. Unlike other sites, SoFi’s lending criteria is heavily based on education and job prospects. That means your GPA, where you got your degree and your income potential are crucial elements. You’re probably wasting your time applying if you flunked out of community college.

Funding Circle is geared toward small business loans, a market segment that was long underserved by traditional lenders. It has made more than $2 billion in loans to 12,000 small businesses worldwide. Businesses have to be in operation for at least six months to apply. They can apply to borrow $25,000 to $500,000 with rates between 5.49% and 20.99%. Loans are fixed and range from one to five years. There is also a 4.99% origination fee on the loan amount.

Peerform caters to less-qualified borrowers looking for personal or business loans. While most lending sites require scores in the mid-600s, Peerform will lend to borrowers with credit scores as low as 600. Loans range from $1,000 to $25,000 and interest rates range from 7.12% to 29.99%. The origination fee is between 1% and 5% of the loan amount. The loans are unsecured and require no collateral.

Upstart began in 2012 places more emphasis on borrowing qualifications beyond your FICO score. Like SoFi, it considers your academic performance, area of study, work history and potential earnings. Loans range from $3,000 to$35,000 and interest rates average $15% on a three-year loan, though they range from 4% to 26%. The origination fee ranges from 1% to 6%.

Borrowing Tips

There are some basic tips every potential borrower can follow to ensure they get the loan they’re after.

Be Honest with Yourself – Look at yourself the way a lender does. You need to convince the lender that you’re the kind of person who will repay a loan, so provide evidence and stress your creditworthiness.

Be Honest with the Lender – Never be misleading or lie. Word travels in the online lending community, so don’t build a reputation for dishonesty. If you’ve had financial or credit problems in the past, come clean. It’s better to be forthcoming than be caught being deceitful.

Lay out Your Case – Explain clearly what you plan to do with the money. Specifically say how the proceeds will be used, avoiding vague statements. Lenders don’t like vagueness.

Neatness Counts – Proofread your application, getting the grammar and spelling right. Nothing says scatterbrained or scammer like a sloppy, hastily-drafted application. Lenders need to trust you, and they want to trust their money to a conscientious borrower.

Don’t Overshoot – Lenders will consider your debt-to-income ratio before they hand you a loan. If your application doesn’t show an income stream or a credit history that is conducive to repayment, it’s unlikely you’ll get what you asked for. Remember, make realistic requests.

Pros and Cons of P2P Lending

For starters, you never even have to leave your house to apply. There are no face-to-face meetings with bank officials who sit there and scrupulously review your intimate financial details.

The Pros

Investors will see your loan request, but you won’t be personally identified. All that’s done online, and P2P loans can be used for just about anything, substituting for second mortgageshome equity credit lines or traditional bank loans.

The entire process, from application to receipt of funds, can be handled in little as two or three days. Traditional loans can take weeks or even months to complete.

P2P loans generally offer competitive interest rates and fixed monthly payments. Applying will not affect your credit score, and the credit requirements may be less strict than at traditional lending institutions.

The Cons

They are mostly on the lending side in the borrower defaults. They also have to manage the collection process unless they use a facilitator company or a collection agency, both of which charge fees.

Those interested in lending should consider all the options and consider making a number of small loans rather than fewer big ones. In most cases, spreading the risk across a larger number of buyers limits potential losses. Working out the details with a financial advisor is a good idea.

P2P loans can be riskier, since a 2017 report from the Federal Reserve Bank of Cleveland found that borrowers had a 34% increase in their credit card balances after getting loans. That report was later retracted after its methodology was questioned.

But those are worries from the investing side. Borrowers face no more risks that they would with traditional loans, and the worst P2P loan is better than any payday loan or getting a cash advance on your credit card.

The Future of Social Lending

P2P lending has quickly gone from a market niche to a major player in the loan industry for a reason. Consumers are always looking for quicker and more convenient ways of borrowing money.

P2P lending platforms are typically smaller, more flexible and more agile than the banks. They can attract borrowers and lenders who want faster service and a better rate.

Those supply-and-demand dynamics are not going to change. If anything, the P2P market is expected to expand as it matures.

The P2P industry was valued at $3.5 billion in 2013. It was almost $33 billion by 2017 and market analysts say it could reach $1 trillion by 2050.

That’s a lot of manna. You have nothing to lose by trying to pick some up.

Bill Fay

Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at bfay@debt.org.

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