Before applying for a loan at Prosper or Lending Club you need to learn the do's and don'ts and necessary requirements to avoid rejection.
This requires proper research as well as a clear understanding of your financial standing.
Understanding these things will help get approved easier at better rates and make lenders more likely to fund your loan.
Unfortunately many hopeful borrowers don't meet the minimum requirements and most have no idea what they've done in the past that killed their chances of securing a peer to peer loan.
As an informed prospective borrower your chances of successfully applying for a loan are greatly increased with peer to peer lenders.
Here are the five most important points that every new borrower should know before applying for a loan at Prosper or Lending Club.
1. Your FICO Score Is The Biggest Factor
With Prosper the lowest FICO score they accept is 640 but scores between 640-660 are considered low and come with significantly higher interest rates than other loans. Rates up to 31.99% are not uncommon for low FICO score borrowers. Prosper assigns every potential borrower a rating and that rating is what will decide your interest rate.
Take a look at a complete listing of Prosper’s interest rates here.
With Lending Club you need at least a 640 credit score before they will take your loan application into consideration. But if with an acceptable credit score there are more qualifications needed. For example, if your FICO score is between 640-719 your debt to income ratio (excluding mortgage) must be under 25% and for potential borrowers with a credit score of 720 or higher that debt to income ratio maximum is 30%. To improve your credit score and get better loan rates read this article from CafeCredit.
2. Keep Your Credit Inquiries Extremely Low
Your last 6 months of credit applications will also weigh in heavily as to whether you are approved to borrow on their p2p platforms or not. Be sure that you don't have more than 3 credit inquiries on record within the last six months because if it doesn't stop you from getting approved to borrow, it will cause your interest rates to be significantly higher. To put it plainly, with Lending Club if you have a credit score under 740 and have more than 3 credit inquiries in the last six months then your loan application will be automatically denied. Prosper Marketplace does not give their required criteria for borrowers in this regard but you can safely assume that they have similar guidelines to Lending Club.
3. Apply Only For What You Need
If you need $10,000 for your debt consolidation or small business loan, don't apply for $20,000 just because having the extra 10K would be nice. Apply for the loan amount needed and nothing more. Here's why. With Lending Club if you have a low FICO score (between 640-678) then you'll pay much more interest for any loan greater than $10,000. So, hypothetically speaking, a $10,000 loan to a C-grade borrower might carry an interest rate of 13.99% but if that exact same borrower chooses to borrow $20,000 or more then the interest rate shoots up to 18.79%.
Prosper’s lending approach is to have a sliding scale for the maximum borrower amount allowed. Only AA and A rated borrowers can borrower the maximum of $35,000; B, C and D rated borrowers are limited to $15,000; E ratings have a $7,500 limit and for HR it is $2,000.
The only amount extra you should add to your loan request is the amount of money needed to cover the origination fees that will be charged from your loan. This rule applies to both Lending Club and Prosper. So if you really need $10,000 then apply for $10,500.
There are no fees for posting a borrower listing on Prosper. Fees are only charged if your loan is funded and money is transferred to you.
4. Get Better Rates On Shorter Term Loans
With Lending Club you have the choice of 3 and 5 year loans, the interest rate difference between them is 2 – 3.5%. If we take the hypothetical C-grade borrower with a $10,000 loan the rate would go from 13.99% for a three year loan to 16.49% for a five year loan.
Prosper is making borrowing less stressful for borrowers who are seeking short-term loans. If you want to borrow short-term with Prosper you can apply for a one-, three- or five-year loan with one-year loans always carrying the lowest interest rates.
The average difference between a one-year and three-year loan is 1%, but between a three year loan and a five year loan the difference is around 3%. For example if you have a Prosper rating of B and have had no previous loans on Prosper then your interest rate will be 14.99% for a one year loan, 15.99% for a three year loan and 18.99% for a five year loan.
Bottom line is you will always save in interest when choosing a shorter term loan.
5. Live In a State That Allows P2P Borrowing
The most frustrating thing some borrowers have experience was becoming excited about meeting all of the financial requirements and guideline of their chosen P2P lender, only to be shut down by their state. Neither Lending Club or Prosper can lend in all 50 states but Prosper lends to more states the Lending Club, allowing borrowers from 47 of the 50 states – the unfortunate three states are Maine, North Dakota and Iowa.
Lending Club loans to borrowers in 42 of the 50 states – the states that are excluded are Iowa, Maine, Mississippi, Idaho, Nebraska, Indiana, North Dakota, and Tennessee.
If you're trying to borrow from one of these peer to peer giant, you will be well served to read through the info provided on Prosper and Lending Club's websites. Lending Club provides a detailed explanation of every factor that goes into determining their credit grade.
Prosper does not spill the beans as to how they decide a borrower’s credit grade and aligning interest rate but it still a very smart decision to read through the help section on Prosper's website on applying for a loan. You will get a great idea of your chances of getting a loan as well as put yourself in position to get better rates in the future if you don't find what you are looking for right now.