What Is Peer-to-Peer Lending?
Peer-to Peer Lending Allows Potential Borrowers To Connect With Investors Who Can Finance Loans
Borrowers apply for loans on peer-to-peer lending platforms, while investors select loans that seem like a good risk. An investor may choose to fund only a portion of the loan or multiple loans. Multiple investors may provide funds to borrowers.
It’s a relatively new approach to the borrowing-and-lending experience. Borrowers may be able to access funds faster by removing traditional financial institutions such as banks. Investors might also see a healthier return.
We will discuss peer-to-peer lending platforms and how they work.
What Is Peer-To-Peer Lending?
Peer-to-peer lending, also known as P2P lending, is an online platform where investors lend loans (or portions thereof) to individual borrowers. Peer-to-peer lending, also known as marketplace lending, is an alternative to traditional loans.
This lending system can be beneficial for both lenders and borrowers. Some borrowers may be able to find personal loans where other lenders have denied them. And peer-to-peer lending platforms may be a good alternative to payday loans or credit cards for some people.
You may be eligible for a competitive rate of interest depending on your credit score. But people with lower credit scores will likely see higher interest rates — sometimes even higher than the average credit card APR.
Though there’s still risk involved, investors in P2P lending may get a better return on their money than they would with some other savings-and-investment opportunities.
Small-business owners may also benefit from lending marketplaces. U.S. The U.S. Small Business Administration stated that peer-to-peer lending could be an option for small businesses looking to finance their operations.
How Does Peer-To-Peer Lending Work?
Online software is used to match potential borrowers and lenders for peer-to-peer lending. While features vary from one platform to the next, there are many commonalities. Peer-to-peer lenders include Prosper, LendingClub, and Peerform.
If You Need To Borrow Money, Here’s How It Works
- Fill out an application, which may include a credit check.
- If you are approved, review the interest rate. You can move on to the funding stage if you wish.
- Let investors look at the loan listing and then decide whether or not to fund it.
- If your loan has been successfully funded, you can move on to the repayment phase. Over the term of your loan, you will make regular payments. Each payment you make will be split among the lenders. They each receive a portion of your payments.
If You Are Looking To Lend Money, Here’s How It Works
- Register on the P2P lending platform that interests you.
- Check out the loan options. LendingClub and Prosper will assign loans a grade to help you assess their risk. Auto investing is also possible.
- You can keep track of all earnings through your online account.
What Are The Fees Charged By P2P Lenders?
There are fees for both lenders and borrowers on P2P lending platforms. It is important to read the terms before you sign up for a loan or give your money away.
LendingClub charges an investment fee, approximately 1% of the total amount received during the grace period or before the payment due date.
If you’re a borrower, you may face extra charges such as an origination fee.
What Are The Best Uses of a P2P Loan?
Many peer-to-peer platforms offer unsecured personal loans. You can use the funds in almost any way you like. However, most lending platforms require you to specify the purpose of the loan.
According to LendingClub, the most popular reasons for borrowing money are debt consolidation, major purchases, home improvements, medical expenses, and mortgage repayments. LendingClub states that loan funds cannot be used to invest, pay for higher education, gambling, or any other illegal purpose.
See our picks for the four best peer-to-peer lenders for personal loans.
Is Peer-to-Peer Lending Safe?
Peer-to-peer lending may seem attractive — there are positive returns without the involvement from a bank.
Be aware that you could lose your loan if the borrower stops paying you through a P2P platform. The FDIC may not insure your P2P investments.
While you’re deciding whether taking out a loan from a peer-to-peer lender is right for you, make sure to shop around and compare terms. Ask yourself some questions.
- Is it possible to repay the loan? Can I repay it?
- Can I find a better rate elsewhere?
- What is the time it will take to repay the loan? Is there a prepayment penalty?
These questions will help you determine if you are financially ready to borrow or lend through a P2P lending platform.