Peer-to-Peer Lending

Peer-to-Peer lending is popular because it provides interest rates to lenders and borrowers that traditional banks cannot.


Peer-to-Peer lending services are conducted online, and they work by connecting individual borrowers who want money with individual investors who want to invest their money in a non-traditional way. Traditional banks do come with a number of advantages, chief among them is a sense of stability that comes when institutions have been operating for decades. However, their overhead means that they cannot be as efficient as online options. Because banks offer more security, there are reasons you may not want to choose peer-to-peer lending. However, both borrowers and lenders who are interested in peer-to-peer lending will find favorable interest rates.

When Borrowers Will Want To Try Peer-to-Peer Lending

There are three reasons why a borrower will want to look into peer-to-peer lending:

  • You want a lower interest rate
  • Your credit score prevents you from getting a traditional bank loan
  • You are starting a business

Low overhead means that peer-to-peer lenders are able to give better rates to borrowers. If you need to consolidate your credit, or if you simply think you are being charged more for your loan than you should be, peer-to-peer loans offer a reprieve. You can borrow from peers, pay off the other loans, and increase your credit score while paying a lower interest rate to your peer lenders.

Peer-to-peer lenders also have a higher tolerance for risk than traditional banks. Because lenders are getting higher interest rates than they would if they had used a bank, the risk associated with lending to a borrower with a low credit score is offset by the potential to earn more. Borrowers with low credit scores may have to pay a higher interest rate than they would if they had a good credit score and went with a bank, but since a bank is more likely to reject their loan, peer-to-peer lending provides them with one of the best opportunities to get a loan in the first place.

In most cases, banks will not give loans to new businesses. They want to see proof that a business has the cash flow required to make loan payments, which means that these startups are typically too high-risk. Assuming you are not a large, established company looking for venture capital, getting a business loan may be harder than you think. With peer-to-peer lending, you can get a loan that allows you to start your business.

When Lenders Will Want To Invest In Peer-to-Peer Lending

Traditional investments, like stocks, bonds and mutual funds, can provide an investor with some security. However, the returns on some of these can low. Additionally, some investors may not like the idea of investing in something that they cannot really understand. When you buy stock in a large company, for example, you may not be aware of what those funds will be used for or what that company will produce. Similar can be said for bonds and mutual funds.

Peer-to-Peer lending carries a higher risk, but with interest rates that can reach as high as 36% if you are willing to tolerate the risk, they can also provide you with more earnings. The trick is to spread the risk among a number of borrowers. Some loans may be unsalvageable, but so long as you do not invest too much into a bad deal, any losses should be more than made up for with the positive earnings you can get from the loans that do end up being successful.

How to Apply For a Peer-to-Peer Loan

One of the biggest advantages that peer-to-peer loans provide is the speed with which they allow you to borrow money. The slowest part is compiling the required documentation. It can help to make sure you have all the documentation before filling out an application, as this ensure that the process does not got held up. The types of documentation can be sorted into three major categories:

  • Identification
  • Tax Documentation
  • Proof of Income Documentation

Once you have the required documents and have filled out an application, the service will calculate the interest rate of your loan based on factors like your credit history and the amount of money you are borrowing. When a peer-to-peer service requests your credit score from the appropriate bureaus, this is known as a soft credit pull, which means that it will not impact your credit score.


The service will then see if its investors are willing to lend to you. If your loan gets funded, the service will ask you to provide certain documents. It will check the information you filled out in the application with the documents you have provided. Assuming the documents match the application, as well as assuming that no additional documentation is required, the service will then send the loan contract to you. Once you have signed the contract, the money you have borrowed will then be deposited in your account. This process may take a few days, but on average you should expect the deposit within 48 hours.

The Most Popular Peer-to-Peer Loan Services

The popularity of peer-to-peer loan services is a somewhat recent phenomenon, having mostly taken place during the past ten years. This has led to an increase in the number of services available. Here are two of the most popular:

  • Lending Club pairs individual investors with borrowers, for loans totaling as much as $35,000. Their relationship with Credit Karma makes it simple to understand how the credit consolidation that peer-to-peer loans enable impacts your credit score.
  • Prosper Club has terms that are similar to Lending Club’s, with one of the biggest differences being the involvement of large financial organizations, such as Sequoia Capital. At their highest, Prosper Club interest rates are 36%.

Though these are the two most popular services, there are a number of other options you may want to choose from, and some of them specialize in a certain types of loan, like student loans. These include

  • Upstart
  • Funding Circle
  • SoFi
  • UpStart
  • PeerForm

All of these services have different rubrics for determining the creditworthiness of a borrower, which means it is worth continuing to explore your options if you cannot get your loan funded at one of them.



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