How does peer-to-peer lending work?
Peer-to-peer (P2P) lending usually takes place strictly in an online platform and is facilitated by a third-party lender. If you are looking to borrow, then you have to submit an online application just like you would with any other loan. You provide details regarding your financial circumstances, including employment, income, assets, credit score, and debts and then wait to be approved. Investors can review your application (no personal details) and choose whether to finance your loan wholly or partially.
Why get a peer-to-peer loan?
Since its inception in 2006, Peer-to-peer lending has steadily grown to become a significant part of the American credit sector. Below are a few reasons why most borrowers settle for P2P loans:
- Significantly lower rates. You will be offered an annual percentage rate (APR) based on your credit history, and this is typically lower than what is offered by a bank. These rates usually vary between 5.3% to about 30% APR mostly depending on what you are looking to finance and what your credit score is like.
- Check your rate. You can always get an interest rate quote without it necessarily affecting your credit score, which is actually impossible with a bank.
- Less work than a bank. Apart from having higher approval loans, P2P loan applications are typically less involved and require fewer documents compared to a traditional bank loan application.
- Flexible eligibility criteria. P2P lenders usually base your rate on your credit history. You can actually apply with less-than-perfect credit, but your rate will be relatively higher.
What loan options are available?
- Unsecured personal loans. This type of loan is very common and always available from P2P lenders, and you can use it to finance anything from a holiday to household purchases. Unsecured personal loans don’t need collateral. You can always borrow up to $50,000.
- Secured personal loans. It is easy to get a secured personal loan through a marketplace lender if you have security, such as property or a car. And if you have bad credit, you may also stand a better chance of being approved only if you can provide collateral.
- Debt consolidation loans. Consolidation of debt is another common reason why people settle for P2P loans. You can roll together debt from various accounts such as personal loans or credit cards and pay it off at a lower rate with a debt consolidation loan.
When to consider other types of lenders
- You have bad credit. Characteristically, you will require a good to excellent credit to easily qualify for a competitive rate with a P2P lender.
- When an emergency expense pops up. With P2P lending, you may have to wait for as long as a week or even more for investors to fund your loan.
- You are in serious debt. Consolidation of debt is, in fact, one of the most common uses for a P2P loan, but if you are already struggling to make your monthly debt payments, then it might not really help.
- You avoiding to pay fees. Quite a good number of Peer-to-Peer lenders charge origination fees, so some people may look elsewhere for a no-fee personal loan.
How can I find the right marketplace lender?
There are a few peer-to-peer lenders available in the US Today. So, here is how you can easily compare and find the perfect one for you:
- How much will I be charged? This is a vital aspect for investors and borrowers to consider. When it comes to borrowing, you need to consider the loan origination fee being charged and what your rate will be. You can generally check your rate without it affecting your credit file. For investors, you’ll want to find out what the provider will charge you in fees.
- Am I eligible? This is actually an important consideration for virtually all borrowers. Always check the minimum criteria and ensure that you meet it before applying.
- What happens if I default? If you want to invest, see what the marketplace lender has in place in terms of collection services for defaulted or late payments. Some lenders will normally take on the responsibility of collecting payments free of charge whilst others will charge a reasonable fee for this service.
I’m an investor. How can I benefit?
If you are an investor looking to get involved in P2P financing, then you can look forward to the following features:
- Diversify your investments. Always decide on a specific amount to fund every loan; that way you can evenly spread your risk among multiple borrowers. This in fact lessens the overall impact of negative results from defaults and late payments from riskier loans.
- Easy for first-time investors. When compared to playing the stock market, which is actually time-consuming and very difficult for first-time investors, P2P lending offers a simpler way to invest. You choose where to put your money based on multiple loan factors and then receive monthly cash flow.
- Different accounts available. You have several account options with some providers, including standard investment accounts and retirement accounts.
- Lucrative returns. Investors can expect returns of between 5% and 9%.
Whether you are a lender or a borrower, Peer-to-peer lending is a great alternative form of credit to consider. Remember that not every form of credit or investment opportunity is going to be right for you, so always compare P2P loans to other options before making the final decision.