Peer-to-peer lending is just like it sounds: instead of seeking money from a financial institution, you find an individual investor through an online platform. So-called P2P lending may be a helpful option if you can’t qualify for a loan via a bank, credit union or other lender.
P2P loans can be more accessible, sure, but they might also include more fees and fewer repayment protections. Below is an explanation of what peer-to-peer lending is, how it works, the pros and cons, and where to find the funds you need.
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Peer-to-peer lending allows you to cut out traditional financial intermediaries, like banks or credit unions, and borrow directly from individual investors. This type of financing might be especially useful if you might not meet the qualifying criteria of more conventional lenders.
While the broad concept of P2P lending has been around for centuries, the structure that we know today began in England in the early 2000s and quickly made its way to the U.S. In the beginning, these platforms were mainly used to help subprime (or poor credit) borrowers consolidate debt at more favorable interest rates than those offered by large lending institutions. However, possible uses have expanded to include home, auto and business loans, among other options.
If you’re considering a P2P loan, keep in mind that there are associated costs. Every lending platform is different, so fees will vary. In general, you can expect to pay interest, which is the amount the investor is paid in exchange for lending you the funds. You may also be charged an origination fee by the lending platform.
Fortunately, there are quite a few reputable peer-to-peer lending platforms available. Here is a list of some of the most popular ones to help you get started in your search:
In many respects, P2P lending and personal loans are similar. Most notably, you can use a P2P or personal loan for almost any legal purpose, with few exceptions.
The application process for P2P and personal loans is also similar. Once your application is approved, you’ll be given a chance to review any offers, accept the best one and receive the payout. After you receive the funds, you’ll make regular payments on the schedule dictated by your loan documents.
However, it’s what happens during the loan approval process that differentiates the two forms of lending. With a traditional lender, your application is reviewed by a single underwriter. On the other hand, peer-to-peer lending sites give your application a rating based on the strength of your financial profile and show it to interested investors. The investors can then decide individually whether or not they’re interested in offering to fund your loan.
You can compare your prequalified rates from Credible’s partner lenders in the table below in just two minutes.
Aside from scammy lending sites, peer-to-peer lending is generally considered to be safe with reputable P2P platforms. However, there is always some amount of risk that comes with applying for a loan, particularly when you go outside of traditional channels.
If you think a P2P loan might be right for you, be sure to do your research. Look into reputable lending platforms, consider any offers carefully and read the loan documents before signing on the dotted line.
Once you’ve decided which platform is the right fit for you, getting approved for a peer-to-peer loan is simpler than you might expect. Here’s the seven-step process:
Like any form of borrowing, peer-to-peer lending is not right for every borrower. Before you move forward with this type of financing, consider the pros and cons.
Tip: Before borrowing a peer-to-peer loan, read your loan documents carefully to understand the repayment protections (or lack thereof) as well as fees. If you deem a P2P loan to be too risky or costly, you might decide that an alternative financing option is a better fit for your situation.
