P2P loans are attractive for borrowers who don't have access to a home equity line of credit, or those who are looking for a better deal than credit cards. Borrowers typically need a FICO score of 660 or above to be approved at Lending Club or Prosper, Cunningham says.
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2 minutes to apply
It can take as little as 2 minutes to fill out an application and a few days to get a personal loan for up to $35,000. Terms stretch to 5 years and funds are delivered in as little as 3 business days, says Cunningham.
Peter Renton, publisher of Lend Academy, says that while the December decision has no immediate impact, P2P rates could slowly start to rise with further Fed rate increases.
In theory, he says rates on P2P lending platforms will move in tandem with and respond to the federal funds rate as it influences the market. Yet, Renton believes there will be a "spread," and that P2P rate increases will not be on par completely with federal rate hikes.
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"I don't think you'll see rates move 1-for-1. There will be some compression. If interest rates (eventually) rise 4%, you might see a 2% to 2.5% increase in the rate for borrowers," Renton says. "But even if that happens, it will still be a better deal than credit cards for most people."
P2P market fueled by investor incentives
Cunningham says rising yields on CDs and Treasury bills could ultimately make P2P lending less attractive to investors if the gap between the "risk-free" yield and P2P yields starts to shrink.
The smaller that gap becomes, the less attractive P2P lending will be for investors. Investors may take on risk to earn a 5% yield when other options are paying 1%, but the proposition is less attractive once those other options yield 3%.
Cunningham says investors could steer toward higher-risk profiles and shy away from A-grade loans since they carry the lowest rates. "Investors might not want (to invest in) 5% loans anymore. They'll have to raise rates, or they won't invest. But we're not at that point, yet," he says.
Investors typically minimize their risk by investing the minimum $25 across dozens, even hundreds, of notes. So, a person with a $5,000 investment might spread $25 in 200 notes of varying risk classes.
Longer-term loans may not be optimal
Lending Memo's Cunningham says institutional investors, which fund the majority of P2P loans, may also trend toward shorter durations in a rising-rate environment.
Locking up funds in a 5-year personal loan may not be optimal when higher rates might be just a year away. "You could see a decrease in 5-year notes and an emphasis on 36-month notes or less," Cunningham says. That could mean higher monthly payments for borrowers.
Renton says that while rising interest rates could impact borrowing costs and investor returns, it's unlikely to negatively impact the industry itself. He points out that Lending Club and Prosper launched during a period when the federal funds rate was near 5% "and they did just fine," he says.
"I see it as a strong business even in a (rising-rate) environment. There will always be people looking to invest at a premium and borrowers looking to refinance. P2P offers superior benefits for both, with yields for investors and lower rates than credit cards," Renton says.