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Peer-to-peer lending services are web-based alternatives to traditional credit sources such as banks and credit unions. They make rate shopping quick and easy and can be a more affordable option for certain loan types. They're also a money-making opportunity for those with the funds to lend others.
How Peer-to-Peer Lending Works
Peer-to-peer (P2P) loans are made available through online platforms that pair potential borrowers with investors willing to issue loans. You might say that P2P platforms bring borrowers and lenders together the way Uber and Lyft match riders to drivers, or the way eBay connects buyers and sellers. A key difference is that P2P borrowers and investors never deal with each other directly; the P2P platforms handle all elements of the transactions, including determining loan eligibility, setting interest rates and fees, as well as collecting payment.
Leading P2P lending sites for personal loans include Prosper, Lending Club and Peerform. All of them provide opportunities for individuals to apply to borrow funds or to become investors who issue loans. Funding Circle takes the same approach but offers small business loans instead of personal loans.
How Does Peer-to-Peer Lending Differ From Traditional Loans?
The main appeal for P2P borrowers is that they'll generally find lower interest rates than are typically available through traditional lenders like banks or credit unions. But P2P lenders offer borrowers other advantages as well:
The P2P loan application processes typically take only takes a few minutes, which makes it easy to shop around for the best deal.
That shopping process is also gentler on your credit scores than applying for traditional loans, because P2P preapproval screenings, which generate offers including loan amount and interest rates, use soft inquiries to check your credit report. A soft inquiry, which also happens when you check your credit score yourself, does not affect your credit score. By contrast, a hard inquiry is made when you apply for traditional loans and typically causes a small reduction in credit scores.
If you accept a P2P loan offer, the lender will likely make a hard inquiry on your credit report before you get final approval. But up to that point, you can compare offers from P2P lenders to your heart's content without any effect on your credit report—something that's not possible with more traditional loans.
Are Peer-to-Peer Loans a Good Idea?
Every peer-to-peer lending platform has its own criteria for deciding who qualifies for a loan, and their requirements can be more strict or more diverse than those of traditional lenders. Minimum credit score requirements may be higher, for instance. In addition to (or possibly instead of) credit scores, P2P lenders also may have steeper income requirements, or want evidence of your educational credentials or job history.
Loan amounts available from P2P platforms typically max out around $40,000 to $50,000 and are offered only to applicants deemed highly creditworthy. Many loans fall into the range of $10,000 to $25,000.
If you meet a given lender's requirements, you can get a lower interest rate than you'd get from a traditional lender, which can make P2P loans very attractive for debt consolidation or any other purpose for which you'd seek a personal loan.
How to Get a Peer-to-Peer Loan
Getting a peer-to-peer loan is a two-stage process. First, based on your credit score and submission of basic background info—name, address, date of birth and income—the lender determines how much it's willing to lend you, and at what interest rate. (It's possible, of course, that they'll decide against making any offer; if that happens, they'll explain why.)
In the course of reviewing your options among the growing number of P2P platforms, here are a few things to consider:
- Read the fine print. Look on the bottom of each provider's homepage for an overview of the loan amounts they offer and the rates and fees they charge.
- Make sure each lender operates in your state. Not all P2P lenders do business in every state; and some have lending restrictions and procedures that apply on a state-by-state basis. You'll find that information in the homepage fine print.
- Check your FICO® Score* and review your credit reports. Look out for any major negative entries. Accounts in collection and recent late payments could hurt your approval chances, even if you meet credit score requirements.
- Beware of upsells. If you qualify for a larger loan amount than the one you request, some P2P sites will encourage you to consider borrowing even more. There's nothing wrong with increasing your loan amount if you can afford it, but keep in mind that even low interest loans can be costly over time.
Once you choose a lender and accept its offer, the lender typically does a more detailed credit check (including a potential hard inquiry). The lender also may ask you to verify your income and to provide additional background information. In most cases, you can submit the necessary information electronically.
The site may take several days to finalize its lending decision. If you get final approval, you'll set up a payment process—most P2P lenders prefer automatic payments from a checking account. The funds can appear in your bank account within a few days.
Do Peer-to-Peer Loans Show Up on a Credit Report?
Generally speaking, peer-to-peer lenders report payment information to credit bureaus, just like traditional creditors do. That means timely payments on a P2P loan will tend to improve your credit score over time, and late or missed payments will hurt your credit score.
P2P lenders can be quicker than their traditional counterparts to submit overdue payments to collections agencies. While most traditional lenders wait at least 90 days before charging off unpaid accounts and selling them to third-party collection agencies, some P2P lenders initiate third-party collections after as little as 30 days of delinquency. Late payments and collections entries on your credit report have significant negative impacts on your credit score, as lenders view them as indications of poor credit management.
Peer-to-peer lending outlets make it extremely easy to shop for loan offers, and qualifying borrowers can expect interest rates and fees that compare favorably with those of traditional lenders.