Published in: Personal Loans | May 13, 2020

Should You Borrow Money From a Peer-to-Peer Lender?

By:  Dana George

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You have options when it comes to personal loans. Learn more about how peer-to-peer loans work and whether one might benefit you.

A woman sitting at a table with a laptop and papers in front of her.

Image source: Getty Images

There was a time when you had to visit a bank or credit union to take out a personal loan. After all, that's where the money was. Today, you have more options. In addition to online banks, you can reach out to a peer-to-peer lender (P2P). 

What is peer-to-peer lending? 

P2P lending is a system that matches people who need to borrow money with investors who want to lend money. It is direct lending via the internet. The owner of the platform (the lender) makes money by acting as a middleman and charging a fee to borrowers and investors. Here's how it works:

  • You log onto an online platform and submit a loan application for an unsecured loan (although some P2Ps offer secured loans, they are rare). You provide basic personal information and fill in the amount you would like to borrow.
  • The lender conducts a soft credit check, assesses your application, and assigns a "risk grade" (or "loan grade"). Like most loans, the assigned grade is directly tied to your credit score and other qualifying information. Although the credit score needed to qualify for a loan varies by lender, the minimum is usually 600.
  • Investors have access to loan profiles, although your identity is kept private. Most loans have more than one investor, and once enough investors express interest to fully fund your loan, it is approved.
  • The lender asks for documentation regarding employment history, monthly income, and debts. You will also need to verify identification and provide pay stubs or W-2s, tasks that can be taken care of online. The lender then runs a hard credit check.

How much can I borrow?

Some P2P lenders offer loans for as much as $40,000 (or more) to the most qualified applicants. More commonly, they range from $10,000 to $25,000. Loans are repaid over terms of two to five years.

It can take a few days to several weeks for funds to be dispersed. Just like any other consumer loan, you will make regular payments, and your payment history will be reported to credit bureaus.  

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What's in it for the investors?

There are at least two ways investors can make money through P2P lending. They can take a risk on a borrower with fair credit and earn a high interest rate on their investment, or they can lend money to a borrower with excellent credit and expect a safe, steady return. 

Advantages of borrowing from a P2P lender

P2P lending offers some advantages, including:

  • Opportunity to build your credit score. If you have average credit and want to improve it, a P2P loan gives you that chance. Because P2P lenders report to the credit bureaus, just as with other loans, your score can improve with regular payments.
  • Fast and easy to apply. P2P online platforms are designed for ease-of-application, and you can apply at any time day or night. 
  • Easy to rate shop. The fact that P2P lenders conduct a soft credit check before providing you with an interest rate and investor options means that you are free to rate shop as much as you need. 
  • More accessible loans. If you have an atypical reason for borrowing or some other factor that makes it difficult to qualify for a conventional loan, P2P may help as some P2P lenders use different evaluation criteria. 
  • Competitive interest rates. P2P lenders have lower overheads, and their interest rates for borrowers with good credit are frequently lower than those found through traditional lenders. 

Disadvantages of borrowing from P2P lenders   

Here are some of the disadvantages of P2P lending:

  • The lender may send your account to collections faster. According to the consumer credit reporting company Experian, most traditional lenders wait a minimum of 90 days before selling unpaid loans to a third-party collection agency. P2P lenders tend to be a little faster on the draw, sending the unpaid debt to third-party collections after 30 days of delinquency. Future potential lenders will see collections entries on your credit report and are likely to worry about your creditworthiness.  
  • May not be available in your state. Some states do not allow P2P lenders to operate, or they only allow certain lenders to do business. Look at the lenders website to find out where your state stands.
  • High interest rates for some borrowers. Those with the lowest allowable credit scores can pay an interest rate of up to 36%. 

It's a brave new world when it comes to personal loans. If your credit score is 600 or better and you find yourself in need of a loan, it may be worth checking out P2P lenders.

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We've vetted the market to bring you our shortlist of the best personal loan providers. Whether you're looking to pay off debt faster by slashing your interest rate or needing some extra money to tackle a big purchase, these best-in-class picks can help you reach your financial goals. Click here to get the full rundown on our top picks.