What is peer-to-peer lending?

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Peer-to-peer lending, or P2P lending, matches borrowers with a network of investors. Unlike a traditional lender, the investors you’re connected with — a group of people (peers) or a company — decide whether to fund your loan. Although the same factors are used to evaluate your loan application as a traditional loan, the eligibility requirements often aren’t as stringent.

For instance, some P2P lenders allow applicants to qualify with a credit score as low as 600. However, before you take out a peer-to-peer loan, weigh the pros against the cons to see if it makes sense based on your financial circumstances.

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

What is peer-to-peer lending?

Peer-to-peer lending brings investors — both individuals and companies — directly to people who need to borrow money. Traditional personal loans come from institutions, like banks, credit unions or online lenders. Peer-to-peer lending is when you borrow money from a person or company investing in your loan.

How does peer-to-peer lending work?

Most peer-to-peer loans are arranged through online lending platforms. The whole process takes place online and usually has a short turnaround time. Here’s how it works:

  1. Prequalification: See if you are eligible for a peer-to-peer loan through the site’s prequalification process. If your application is successful, a lender will give you an estimate of what the loan terms and annual percentage rate (APR) — your interest rate, plus any fees — could be after you submit a formal application.
  2. Application: If you qualify and like the terms and rate offered, submit a formal application. Afterward, a lender will perform a hard credit check, which will result in a temporary ding to your credit score.
  3. Approval: Next, wait for a lender to decide whether to approve your loan.
  4. Funding: Once approved, your loan will move to the funding stage, where multiple investors will review your loan. Investors will either pass or agree to fund all or a portion of your loan, depending on how much you want to borrow.
  5. Electronic transfer of funds: Once your loan gets enough investors, you’ll get your money, usually through an electronic transfer. In some cases, your funds can be deposited in as short as one business day.
  6. Loan payments: When the time comes to repay your loan, you’ll make fixed monthly payments that get disbursed to all the investors on your loan based on your repayment terms.

Key takeaway: When shopping for a peer-to-peer loan, prequalify with as many lenders as possible to find the best deal.

What fees do peer-to-peer lenders charge?

The most common fee you’ll encounter with peer-to-peer lenders is an origination fee, which is typically up to eight percent of your loan amount. This fee is either charged up front or taken out of your total loan amount. You may also be charged late fees if you miss a payment. Other fees will depend on the lender you work with.

Key takeaway: Before you take out a P2P loan, understand what fees, if any, it charges. An origination fee can reduce your loan amount a lot.

How does it work if I want to lend money?

If you would like to lend money through a peer-to-peer lending provider, you’ll create an account on your platform of choice and review the loan options and terms. There is risk associated with this investment, and some platforms will help you make decisions on individual loans while others will disperse your money automatically. You’ll be able to track loan repayment through your account.

Is peer-to-peer lending safe?

Peer-to-peer lending platforms are not traditional banks or online lenders, which might make you nervous about borrowing from them. That said, investors take on the most risk; if borrowers don’t repay their loans and they go into default, investors probably won’t get their money back.

As far as security goes, peer-to-peer platforms safeguard your personal and financial information just as a traditional bank or online lender would.

What can I use a peer-to-peer loan for?

Most peer-to-peer loans are unsecured personal loans. Like personal loans from financial institutions, you can use them for almost any legal purpose, like:

Some loans have restrictions. For instance, you might not be able to use your loan to pay for higher education costs. Most won’t let you use your money for gambling.

Where can I get a P2P loan?

There are a lot of online marketplaces that offer P2P loans. Here are some popular P2P platforms to help jumpstart your search:

  • Prosper: Founded in 2005, Prosper was the first peer-to-peer lender in the United States. It offers personal loans to qualified borrowers that range from $2,000 to $40,000; origination fees range from 2.41 percent to 5 percent. To qualify, you must have a minimum FICO score of 640.
  • Upstart: Upstart is a P2P lender that allows qualified applicants to borrow $1,000 to $50,000; it has an origination fee that ranges from zero percent to eight percent. To qualify, you must have a FICO or Vantage Score of 600.
  • Funding Circle: Funding Circle connects borrowers seeking small business loans with a network of investors. It offers term loans up to $500,000 and a line of credit up to $150,000 to qualified applicants.
  • Kiva: This not-for-profit organization connects borrowers who need money to fund their small businesses with a network of lenders who aren’t seeking a profit. Instead of using your credit history as a key factor, Kiva requires you to get a certain number of people to send you money through the platform. Once the threshold is met, your loan becomes available for public funding.

Benefits and drawbacks of peer-to-peer lending

If you’re thinking about taking out a personal loan through a peer-to-peer marketplace, make sure you know the pros and cons first.

Pros

  • Fair credit allowed: Some peer-to-peer marketplaces allow borrowers to have credit scores as low as 600. This is good news if you don’t have great credit — or much credit at all — and can’t find a loan through other means.
  • Quick funding process: As with all online lenders, you’ll complete your application within a few minutes and, if you’re approved, you can expect your money within a couple of days. Some banks and credit unions might take much longer to fund your loan or may require in-person applications.

Cons

  • You might have more fees: Peer-to-peer lenders tend to charge origination fees, ranging from 1 percent to 8 percent of your loan amount. Not all charge this fee, but you’ll want to review all fees before completing an application.
  • You could have a higher interest rate: Depending on your peer-to-peer marketplace, you might have a higher interest rate than you would with traditional lenders. Your credit score also determines your interest rate: The lower your score, the higher your rate. Shop around for the best peer-to-peer lending rates before completing an application.

Peer-to-peer lending vs. bank loans

The major difference between peer-to-peer loans and bank loans is who funds them. If the money comes from a lender who is an individual or a group on a web-based platform, then it’s a peer-to-peer loan. If the money comes from a credit union, bank or another financial institution, then it’s a bank loan.

Many banks offer some of the lowest rates available, which is enticing for borrowers with excellent credit. If you already have an account with a traditional bank, you might want to explore personal loans through it. With that said, banks tend to have stricter qualification requirements and slower funding timelines.

Loan amounts and repayment terms of bank loans and peer-to-peer loans are similar, but if you only need to borrow a little bit of money to hold you over, consider browsing peer-to-peer lenders that offer low dollar amounts.

PEER-TO-PEER LOANS BANK LOANS
Funds from individuals or groups of people Funds from financial institutions
Flexible options for people with less credit history Stricter qualifications
Online application May require an in-person application

Get pre-qualified

Answer a few questions to see which personal loans you pre-qualify for. The process is quick and easy, and it will not impact your credit score.

The bottom line

While peer-to-peer lenders offer personal loans just like other financial institutions, they aren’t quite the same. This type of lending brings you directly to financial backers. It’s an investor funding your loan, not a bank.

If you don’t have great credit or want to cut out the middleman, peer-to-peer lending might be great for you. But before you complete an application, you’ll want to compare:

  • Interest rates
  • Fees
  • Repayment terms
  • Loan amounts
  • Time to get funded

Not all lenders or marketplaces run the same way. Make sure you’ve done your research before applying for a personal loan through a peer-to-peer marketplace.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Loans Editor