What is Peer-to-Peer Lending?

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Peer-to-peer (“P2P”) lending is essentially just one of the many options available to those looking to borrow money. It is a popular option for many borrowers because it allows them to circumvent the traditional bank loan process.

If you are in the market for a loan, P2P loans are worth considering. Here, we are breaking down the basics of this alternative (and increasingly mainstream) borrowing option, as well as a few tips on how to use them well.

What is P2P borrowing?

In short, P2P loans are made by individuals and investors as opposed to banks or credit unions. They tend to be free from many of the bureaucratic hurdles that come with traditional loans, and the approval process is generally more streamlined and simple for borrowers. These loans can carry several other major benefits for eligible borrowers, including the following:

Lower interest rates

While banks have overhead costs to cover, P2P lenders are generally free to offer loans at much lower interest rates. As such, it often tends to be a better deal for borrowers seeking to save money in the long-term.

A more streamlined process

Seeking a traditional loan involves plenty of bureaucratic hurdles. Conversely, working with a P2P lender is generally straightforward and compresses the approval timeline, so you will know sooner than later whether you were approved for a loan.

Credit blemishes are generally not fatal

As with any loan, your credit score matters: However, P2P lenders tend to be more tolerant of past credit issues. Additionally, individuals without a robust credit history may still apply for P2P loans.

What is the process?

As with a traditional loan, your first step will be selecting a lender and commencing the application process. You will be expected to provide details about yourself and your borrowing history, and you will go through a credit check.

Some P2P lenders provide funding quickly, but in other cases, you may need to wait longer for funding to come through. Once your loan is funded, you will receive the money electronically and repay the loan via an automatic bank account draft. Generally, you will be expected to repay the loan over three to five years – but you can also prepay without penalty.

How can I use my P2P loan?

Many P2P lenders offer unsecured loans. This means you can use the funds nearly any way you want. However, most lenders will ask you to state your intended purpose for seeking the loan. Popular reasons include debt consolidation, funding home improvement costs, covering medical bills, or making other major purchases. Generally, these loans cannot be used for investments, to fund higher education, or to engage in illegal activities like gambling.

Types of peer to peer loans

Generally, P2P loans are available in amounts of up to $40,000. There are a few main types of these loans available to borrowers, but the two most common are:

Personal loans

Borrowers may use P2P loans to fund medical accounts, large purchases, home improvements, and to consolidate debt.

Business loans

Business loans can cover startup business costs like marketing, facilities, and inventory.

P2P loans can be made across state lines, but not all P2P platforms are available nationwide. As such, check out major P2P lenders for details on availability.

Advantages of investing in P2P loans

Some of the best P2P lending benefits come to those who invest in P2P lending. In many cases, P2P lending offers investors a strong return on investment. In particular, investors who stick to low-risk loans earn closer to a 5% ROI. Additionally, many investors feel P2P investments are easier to understand than many traditional forms of investing, and groups such as Lending Robot enable automated lending platforms so investors can adopt a “set it and forget it” mentality.

Peer to peer lending and debt relief

If you are struggling with debt, a peer-to-peer loan can be a great debt relief option. Peer-to-peer borrowers tend to benefit from lower interest rates while investors enjoy a strong ROI. Additionally, in recent years, P2P platforms have become increasingly less restrictive, allowing more and more lenders and borrowers to participate. Borrowers then gain the cash they need while lenders gain more of a return on their money than they would in a high-yield savings account.

Tips for Borrowers

Here are a few basic tips to consider if you intend to seek a P2P loan:

  • Be honest with your lender – Under no circumstances should you be dishonest or lie to your lenders. The online world is intimately connected and word travels fast. If you have a reputation for lying or attempting to cover up your past credit blemishes, people will find out. It is best to forthcoming at the outset than to hope no one “finds you out” later.
  • Explain your case – Make sure you clearly explain to a prospective lender why you want the P2P loan and how you intend to use it. Lenders tend to be put-off by vagueness, so be as specific as possible.
  • Keep your application clean – Proofread your loan application and make sure your I’s are dotted and your T’s crossed. This will help you present yourself as a trustworthy borrower.
  • Be realistic – Do not overshoot your loan request – keep it narrowly tailored to exactly what you think you may need. This is particularly important if your application does not show a consistent income stream or a strong credit history. 

A Viable Option

Peer to peer lending has increasingly gone from a niche market to a key player in the financial industry. As such, if you play your cards right, you may be able to score a P2P loan to help you fund big purchases or pay off debt. However, as always, do your research, be honest, and maintain realistic expectations before stepping out into the great unknown. When in doubt, reach out to a financial advisor for guidance.