What You Need to Know to Invest in Peer-to-Peer Lending

by Fern Alix LaRocca CFP® EA · 0 comments

WomanPayingBillThis article was contributed by Hemila Pedram-Parsi, who is a copywriter and author. You can contact her at hemilapedram@gmail.com

Peer-to-Peer Lending, commonly referred to as P2PL, is exactly what it is: a person-to-person lending. It is an alternative to traditional credit lending for small loans.

Peer-to-Peer has become a great option for people who need a personal loan and people who want to lend it to them. Peer-to-Peer Lending is a type of micro lending.

P2PL companies, such as Lending Club and Prosper, manage peer-to-peer lending online in these major three steps:

Check the borrower’s credit to make sure they are eligible for a loan

Assist investors to lend money to the borrowers

Help borrowers to pay their loans back to the investors

The reason for the growth of the peer-to-peer lending’s popularity for both consumers and the lenders are these major reasons:

The interest rates are generally low for consumers who want to get a small loan

The loans are term-based, generally 2-5 years versus traditional bank loans

The Investors get a better return on their investments.

Even though the interest rates are low, they might be higher depending on the risk involved and that has to do with the borrower’s credit score.

The better your credit score is the better are your chances of getting lower interest rates, because of the lower risk for the lenders.

Who is P2PL for?

It is for anyone who needs to get a small personal loan. Generally people who want to consolidate their debt, like credit card bills or for a person who might have an unexpected expense.

What are the advantages of getting P2P loan?

Lowest interest rates

Fixed rates that would not go up

Fast and simple applications process

Low late fees

No prepayment penalty.

For example, Prosper offers unsecured loans from $2000 to 35,000. Their interest rates are from 6.6% to 35%. The loan average is about 13000 with 13.9%. The investors earn in average between 5%-9.5% depending on the risk involved.

Lending Club: Their personal loans are from $1000 to $35,000 with interest rates from 6.6% to 29.9%. Average loan is about 15,000 with a 13.4% APR.

Do these companies have any fees for their services?

Yes, both Prosper and Lending Club have a fee for new loans. Lending Club has a 1.11% – 5% fee of the total loan amount. And Prosper has 1-5% fee. It varies based on the size of the loan. The origination fee is included in your APR and then subtracted from your total loan balance before you receive your loan.

On late payment fees both Prosper and Lending Club have a low fee of $15.00 charge for the bound check or 5%, depending on whichever is greater for over 15 days late payments.

Why can these Peer-to-Peer Lending companies offer low interest rates and fees?

All the process is done online, unlike other finance institutions that have lots of overhead expenses; the P2PL companies have fewer expenses so they can pass on their savings to the consumers.

What are some of the drawbacks of Peer-to-Peer Lending?

You must have a good credit score

Fees to pay

If you default on your loan, it will have an adverse effect on your credit score rating

Higher Payments

Higher interest rate based on your credit score

Note: Always research to understand the risks, conditions and terms of each company’s loan terms.

How does it work?

Each P2PL has a quick online step-by-step process for you to follow. First step is to fill out the online application. You also need to have a good credit score to be eligible. The process usually can be as fast as seven days.

Are there other P2PL Companies that offer different types of loans? Here is the list of some P2PL companies, which offer different types of loans:

Funding Circle offers business loans

Lending Club also offers small business loans beside personal loans

SoFi for refinancing student loans

Kiva is a non-profit that helps alleviate poverty in other countries by lending them money

Other Peer-to-Peer Lending companies for personal loans beside, Lending Club and Prosper:

Upstart offers personal loans

Zopa offers personal loan (a UK-based company)

You also want to be aware of scams – Read this article for what to look for here.

Finally, before you get any loan, make sure that you do your own thorough research and find the best alternative that works for you and your situation.

Previous post:

Next post: