What is Peer-to-Peer Lending? Is It Legit?
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With the recent uptick in interest rates in the aftermath of the pandemic, the landscape of personal lending is undergoing a significant transformation. This shift has prompted borrowers to explore alternative avenues for managing and consolidating their debt more effectively. Peer-to-peer (P2P) lending platforms are a compelling option, offering the allure of simplified application processes and potentially lower monthly payments than traditional banking and financial institutions. In this new economic climate, where saving on interest is more crucial than ever, P2P lending is a modern solution for individuals aiming to optimize their debt repayment strategies.
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What is peer-to-peer lending?
There is a wide variety of online lenders on lending sites. One lending company that’s become more popular over the past few years is peer lenders. Peer-to-peer lending companies (P2P lending platforms and lending circles) 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.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
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How do peer-to-peer lending platforms work for borrowers?
The process of getting P2P loans as a borrower is relatively straightforward. A specific P2P lending platform acts as a middleman between you and individual investors or lenders 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 online form about your income, credit score, and the amount you’re interested in borrowing. Once you've accepted the terms and conditions, you can get approved and receive your loan in as little as one day.
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 or older and you may need to supply a photo of your driver’s license or another photo ID 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 much quicker 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 you can likely 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 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 to get better rates on their loans when refinancing, individual investors interested in helping fund P2P loans can also make money.
As an investor, you can examine 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 a worse credit history who may be more likely to default on your loan. When it comes to making money off your loan, as the borrower makes repayments, you’ll receive interest on the money you lent.
This allows you to grow your money at a higher rate than traditional high-yield savings accounts, and it may also give you the warm feeling of helping someone less fortunate than you. Just because someone has bad credit doesn’t mean 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. 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 can 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 various borrowers, helping to mitigate some of the risks of going all-in on one borrower.
What do you need to invest in P2P loans?
Thanks to P2P platforms, it’s easy to start investing in peer-to-peer loans. Most online platforms offer all of the managerial tools and underwriting for the loans, so 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 them 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 set up your investor account. Since many peer-to-peer lending platforms allow you to invest in loans in smaller increments of $25 or $50, you can even start with minimal assets. Some lenders, such as Prosper, even offer automated options for distributing your investment across different loans to meet specific goals, netting most investors an average return of 5%.
Related: Best Peer-to-Peer Lending Companies
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
What are some peer-to-peer lending companies?
Now that you understand how peer-to-peer lending works, it’s a good idea to look at some of the top P2P lenders. When it comes to P2P lending platforms, each option differs slightly in terms related to underwriting, origination fees, and creditworthiness. Here’s an overview of some of the most popular P2P lenders online.
LendingClub
LendingClub 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 many purposes, whether 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 8.98% to 35.99%.
Prosper
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. The maximum personal loan you can receive through Prosper is $50,000; 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 8.99% 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.
Upstart
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 topping out at $50,000. Upstart has higher APRs on average—even on the low end of loans—with ranges landing between 7.8% 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.
Funding Circle
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. 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 starting as low as 7.49%, you may get better financing through Funding Circle than other options.
Funding Circle only allows individual investors who qualify as accredited investors.
Happy Money
Happy Money's main focus is helping consumers get out of debt, so if you’re looking into a personal loan for debt consolidation, Happy Money is worth considering. In the interest of promoting financial wellness, Happy Money eschews late fees. It offers borrowers a single, easy-to-manage monthly payment at lower interest rates than they may otherwise have with creditors. With APR ranging from 11.72% to 17.99% and loan origination fees under 5% depending on your credit, you can likely cut your interest rate in half by switching to a Happy Money peer loan, ranging from $5,000 to $40,000.
Kiva
Kiva is a P2P lending platform specifically focused on helping others through microloans. As such, loans are offered for as little as $25 for various causes and reasons. Kiva is all about positively sharing your wealth by paying it forward. Unlike crowdfunding platforms like IndieGoGo or Kickstarter, Kiva allows you to lend money and get it back, with less than 4% of borrowers defaulting on their loans. If you’re interested in social goods 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.
Use Quicken Loans to Get a Personal Loan
- If you're tight on cash right now, you may want to consider getting a personal loan. A personal loan is a loan that you can use for just about any purpose like: paying off other debt, renovating your home, or family needs like a wedding or adoption.
- TrustPilot Rating 4.6 out of 5
- Connect with lenders for $0
- 100% online experience.
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 focus on catering to specific needs or goals like small business loans or debt consolidation. In contrast, 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 simultaneously. While some inherent risk is 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 personal finance, research, and information are your greatest assets, 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.
Related: How to Make Money Crowdfunding
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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