This nontraditional option may be able to fund your loan without draining your wallet.
How does peer-to-peer lending work?
Peer-to-peer (P2P) lending works through an online marketplace where borrowers get connected with potential investors. You submit an application with details about your financial situation, including your income, employment, debts and credit history. Your application is then given a grade, which investors use to determine how much money they’re willing to lend you as well as your interest rate.
Many peer-to-peer platforms have algorithms that can process your application in just a few minutes. However, because an investor can choose to partially fund your loan, it may take longer to receive your funds than with a traditional personal loan from a direct lender. If your loan is fully funded, it will be deposited into your account, generally within a few days.
Top 5 peer-to-peer loan options
These top peer-to-peer lending options can provide you with the financing you need to tackle a large expense.
With over a decade of experience, LendingClub is one of the largest online peer-to-peer lending marketplaces in the world. Not only is it one of the few options that allows cosigners, you can also use it to connect with investors looking to fund both personal and business loans. And if you need to lower your monthly payments, LendingClub offers auto loan refinancing and medical loan refinancing options.
Prosper is one of the peer-to-peer lenders that started it all. Your origination fee — the amount deducted from your loan before you receive it — is based on your finances and your creditworthiness. Investors within Prosper’s network fund a variety of loan needs, from medical loans to personal loans for weddings and vacations. As long as it’s legal, you may be able to fund your next big expense through Prosper.
With loans up to $100,000, you may be able to score a loan without having to carve out time to visit a bank and fill out a long application. As one of the few lenders that doesn’t charge origination fees — or any fees, for that matter — you won’t have to worry about getting less because of a high origination fee or your loan’s cost increasing because of a late payment.
Upstart is a relative newcomer to the peer-to-peer lending space. It’s only been around since 2012, but that hasn’t stopped it from making headway as a top contender for peer-to-peer loans. It focuses on recent college graduates and may use your GPA, SAT score and work history to inform your interest rate and loan amount. However, you’ll need a low debt-to-income ratio and decent credit in order to qualify.
With one of the lowest interest rates available for well-qualified borrowers, Peerform is a peer-to-peer lender that offers mid-sized loans as an alternative to traditional bank loans. And with its invite-only debt consolidation program, you may be able to lower your monthly payment or reduce your interest rate by combining your current credit card or other loan debt into one bill.
Compare peer-to-peer loan options
What loan options are available?
While peer-to-peer lenders may offer a variety of loans, you’ll usually find most offer one or more of the following:
- Unsecured personal loans. Peer-to-peer loans are often unsecured, which means you won’t have to put up any collateral as security. Loan amounts usually range from $1,000 to $50,000, and you can use your funds for just about anything.
- Secured personal loans. If you have security, such as a car or valuable piece of property, you can take out a secured personal loan through a peer-to-peer lender. If you have bad credit, a secured loan may give a better chance of being approved and getting a lower rate.
- Debt consolidation loans. If you have a few different loans and credit cards that are draining your budget, a debt consolidation loan from a peer-to-peer lender may be helpful. You may be able to lower your monthly payments by combining your debts into one loan.
- Business loans. A newer type of financing is personal loans for business or P2P business loans. These business loans can help grow your business or get it up and running.
Why get a peer-to-peer loan?
Peer-to-peer lending has been a growing part of the American credit sector since its inception in 2006. Here are a few reasons why borrowers choose to take out P2P loans:
- Lower interest rates. The interest and fees you pay for a peer-to-peer loan is generally lower than what you’d find with a bank. APR tends to vary between 5.3% to 30%, depending on what you’re looking to finance and your credit score.
- Flexible eligibility criteria. Peer-to-peer lenders base your rate on your credit history, income and other factors that a bank may not necessarily consider. You can apply with less-than-perfect credit, but your rate will be higher.
- Less work than a bank. Typically, P2P loan applications are less involved and require fewer documents than a traditional bank loan application. They also tend to have higher approval rates.
- Check your rate. You can get an interest rate quote without it affecting your credit score, which is usually not possible with a bank.
When to consider other types of lenders
- You have bad credit. You’ll typically need to have good to excellent credit to qualify for a competitive rate with the best peer-to-peer lenders.
- You have an emergency expense. With peer-to-peer lending, you might have to wait a week or more for investors to fund your loan. Peer-to-peer lending isn’t optimal if you’re under a time crunch.
- You’re in serious debt. Debt consolidation is one of the most common uses for a P2P loan, but it can’t help if you’re already struggling to make debt payments.
- You don’t want to pay fees. Most P2P lenders charge origination fees, so you might want to look elsewhere for a personal loan without fees.
3 questions to ask when comparing peer-to-peer lenders
Before you jump onto a peer-to-peer lending site, ask yourself these three questions to make sure you’re ready to borrow:
- How much will I be charged? This is an important aspect to consider for borrowers and investors. When it comes to borrowing, you need to consider what your rate will be and how much the loan origination fee will take out of your loan funds. For investors, you’ll want to find out what the provider will charge you in fees.
- Am I eligible? This is an important consideration for borrowers. Check the minimum criteria and make sure you meet it before applying. If your lender doesn’t offer preapproval with a soft credit check, applying could result in a dip in your credit with no loan to show for it.
- What happens if I default? If you want to invest, see what the marketplace lender has in place in terms of collection services for late or defaulted payments. Some lenders will take on the responsibility of collecting payments and some will charge a fee for this service.
How can I benefit as an investor?
If you’re looking to get involved in peer-to-peer lending as an investor, you may benefit from some of the following positive points:
- Lucrative returns. Many investors have returns sitting between 5% and 9%.
- Diversify your investments. You choose how much to fund per loan and you can spread your risk among multiple borrowers. This lessens the impact of negative results from late payments or defaults from riskier loans.
- Easy for first-time investors. Playing the stock market may be difficult and time-consuming for first-time investors, but P2P lending is a much 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 can have multiple account options with some providers, including retirement accounts or standard investment accounts.
Peer-to-peer lending is a great alternative to personal loans for both borrowers and lenders. Most offer similar amounts, equal terms and have the added bonus of getting you away from a single lender with more strict eligibility requirements. However, that doesn’t mean you won’t have to meet any — you’ll still need a regular source of income, and many P2P lenders have a minimum credit requirement as well.
Not every peer-to-peer loan will be right for you, so compare your options before making a final decision.