If you're reading this article, it's probably because you're wondering, "What is peer-to-peer lending and how does it work?"
Well, we're going to explain exactly what it is for you in an easy to understand way as well as provide a great infographic to help illustrate some of the major points.
With traditional banks denying loans to small businesses more and more, people are far more interested in how to get a peer to peer loan and what it involves. This revolutionary online lending avenue is a great investment for everyday people and also a great way for creditworthy borrowers to secure low-interest personal loans from their peers.
By the end of this article you will know the benefits of borrowing and investing with p2p lending sites and even the best peer to peer lending companies to get involved with if you choose to do so.
What Makes Peer to Peer Lending Different From Traditional Bank Loans?
When explaining what is peer-to-peer lending, we have to talk about banking too. Unlike traditional bank loans where a potential borrower goes to the financial institutions and banks and applies for funding, peer-to-peer loans connect these borrowers directly with retail investors. Borrowers still need to be upfront with what the borrowed money will be used for just like they would with a bank, but with p2p loans there is far less paperwork and red tape to deal with.
Various Names Confuse People About What Peer-to-Peer Lending Is....
People often ask "what is peer to peer lending?" but they've actually learned something about it already. The problem is that since it is relatively new in the United States it is often known by different names and titles. Peer to peer lending is also known as social loans or consumer loans, and now that so many big banks and financial institutions are starting to fund p2p loans, some have even begun calling it "marketplace lending" instead of peer to peer lending.
What is Peer to Peer Lending?
- A Great Way To Get An Unsecured Loan From Your Peers
Peer-to-peer lending is a type of unsecured personal loan that allows regular people to borrower from other regular people through an online lending platform. The P2P lending websites acts as intermediaries or brokers between the two sides.
Take a look at the "What is Peer-to-Peer Lending?" infographic below from Jeanne Dugan and the Wall Street Journal. It helps explain how peer-to-peer lending works for those who are visual learners.
What is Peer-to-Peer Lending? Let The Infographic Explain...
So now that you know how to get a peer to peer loan, let's look at reasons why people are deciding to apply for peer-to-peer loans more than ever before.
Primary Reasons People Borrow P2P Loans
What is Peer-to-Peer Lending you ask? An easier way to get the loans you need. There are various reasons to borrow through peer-to-peer lending sites, some of the main reasons are to consolidate debt at a lower interest rate. P2P companies are becoming a popular choice for people who are currently being gouged by extremely high interest rates as well as people who can't get a home equity line of credit. Because peer-to-peer loans are unsecured you don't have to worry about losing your home or valuables if there happens to be a loan default, there is no collateral lost. The flexibility that peer-to-peer loans bring to borrowers has helped thousands of people fund their small business startups, pay off credit cards, pay for medical procedures, make home improvements as well as fund large purchases such as automobiles.
What Are The Requirements If You Want To Borrow?
In explaining what is peer-to-peer lending, we need to describe the requirements. Each p2p lender has their own requirements for borrowers, but we will talk about the two biggest peer-to-peer lending companies in the United States, Prosper MarketPlace and Lending Club. To get approved for an unsecured p2p loan from Prosper you need to have at least a FICO score of 640 or higher. There are other aspects taken into consideration when receive your borrower application, but your credit score is the first thing they will look at.
Lending Club requires a 640+ credit score and they are known to be the more difficult lending platform to get funding from between the two.
Both companies offer standard unsecured P2P loans up to $35,000, if you are seeking medical loans or certain types of business loans they have different services available for you that may enable you to get more than $35,000.
Most P2P lenders rate prospective borrowers on credit-worthiness by assigning grades to borrowers determined by your credit score, debt ratio and other factors. This helps their investors select the loans they would like to fund.
The better your borrower grade, the better your interest rate will be, and your peers are more likely to see your loan opportunity as an attractive investment. But don't worry if you don't have the best grade from Prosper or Lending Club, many investors will still loan to you, loans for lower-graded borrowers pay more interest and that's often very appealing to more aggressive investors. If you're approved to request a loan on the major lending platforms you have a great chance of getting your loan funded.
By now you should have your answer to the question "What is Peer-to-Peer Lending?".
In a nutshell, the "What is Peer-to-Peer Lending?" Infographic above explains exactly how peer-to-peer lending works and what's better.... It's not too difficult to get a peer-to-peer loan if you meet their reasonable credit requirements. It only takes 5 minutes or less to check your rates and it doesn't affect your credit score at all. So if you are in need of funding and don't want to deal with the banks, do it online from the comfort of your home.
What is Peer-to-Peer Lending? A MAJOR Advantage For Borrowers
Person to person loans lenders like Prosper and Lending Club make sense for both borrowers and normal people that want to lend money online and earn great rates. Let's focus on the benefits of borrowing first.
♦ Lower interest rates in comparison to banks and credit cards: Prosper Marketplace, Lending Club, Funding Circle and the rest of US peer to peer lending sites have far lower business overhead because they operate online instead of from brick-and-mortar banks. This is a major reason in the rise in popularity of p2p loans, the lending companies are able to offer lower interest rates and fees to borrowers on their websites.
Consider this, most p2p loan borrowers are enjoying interest rates 5% - 6% lower than their credit cards offer. This is a huge difference in savings, over time this means thousands of dollars saved. This is a major reason why so many people look to eliminate credit card debt with peer to peer loans. Most banks won't even attempt to offer you such low rates because they simply cannot afford to do so, although there are a few that are adapting their business model over to online lending as well.
♦ You get a fixed-rate: Most of us have experienced the wonders of a great introductory rates on our credit cards in the first year only to get crushed by the high rates that come afterwards. Credit card companies are well-known for altering your rates as they see fit. This does not happen with a peer to peer loan. If you are offered a rate of 10% from Prosper or Lending Club, that's what the rate will be at the end of your loan term as well. The major two p2p lending companies never raise your interest rate. Even if you have a late payment, your interest rate will stay the same.
♦ Low late fees and no penalty for prepayment: Speaking of late payments, you'll find that peer to peer lenders generally charge lower fees than banks and credit card companies. The typical late fee from a p2p lender is under $20. One of the highlight benefits of borrowing from Prosper and Lending Club is that you can pay your loan off early and not be penalized for it. This means that you can cut down the amount of interest you pay even more without being treated like you've done something wrong by paying back the money "too quickly".
♦ It's super-simple & quick to apply for: No more dragging yourself into the banker's office as if they were your school principal and you were the insolent child. Many people find going to the banks and presenting their case for a loan a very uncomfortable and sometimes embarrassing situation especially if they are ultimately rejected for the loan. That's not an issue when applying online to a peer to peer lender. Everything is done online, you have no stuffy banker thumbing through your paperwork and judging you. You simply get online, submit your documents and information electronically, and if you're approved for a p2p loan it will be deposited into your account after it is funded by investors on the lending platform.
Advantages of Investing In Peer to Peer Loans
Addressing the question, "what is peer to peer lending?", brings forth a two-fold answer. Because borrowers aren't the only people to benefit from it. Some of the best peer to peer lending benefits come to those who earn money from investing in peer to peer lending.
#1 - You can earn a healthy 5-9% return
Stashing your money in a low-yield savings account is a complete waste. In fact, it's likely that you're losing money by "saving" it in a bank. But instead of worrying about why are savings account rates so low, put your money to work by investing in peer to peer loans.
Peer to peer lending offers investors an amazing return on investment. Most tenured lending accounts (at least 18 months old) realize consistent returns between 5-9%, depending on the risk-level of loans taken on. Investors who play it safe and stick to low-risk loans earn closer to 5%, while the gunslinger-mentality investors who invest in riskier loans often earn at rates closer to 9% and higher.
It's easy to assess the risk level of peer to peer loans as an investor. All borrowers on the major lending platforms are assigned grades. The borrowers with lower grades are considered riskier investments while those with higher loan grades are seen as the safer loans. Many seasoned investors have learned to pick through the "risky" loans and earn a higher return rate. It's true that A-grade borrowers are more likely to pay back but the interest rate on lower grade loans (like Es) pay out much higher interest rates. Either way though, you don't find people losing money through peer to peer investing like you often do with other forms of investments.
Your yield will be the average interest rate of the borrowers you choose to lend to minus the loans that are not paid back (defaulted loans). The typical default rate for Prosper Marketplace and Lending Club is near 5%. You also have to consider the origination fees that the major p2p lending sites charge, which ranges between 1-6%.
#2 - Peer to Peer Lending Risks vs Stock Market Risk: P2P Far More Stable
Peer to peer loans have never lost money for its investors, you can not say the same about the stock market which had a massive crash a few years ago.
Admittedly, stock returns are generally higher than p2p loans, but the stability of peer to peer loans is a benefit that helps investors sleep at night. Peer to peer loans are part of an asset class known as "consumer credit".
Consumer credit is one of the most stable forms of investment you can put your money into, but previously, this type of loan investment opportunity was only available to the banks. But now, peer to peer lending allows normal people to act as a bank and benefit from the almost guaranteed positive returns that consumer credit loans provide.
By diversifying your peer to peer loan investments across hundreds of different borrowers, your account will begin to reflect the steadily low default rate of the consumer credit asset class, gaining stability and consistent returns on investment. Peer to peer lending risks are very low.
#3 - P2P Investments Are Easy To Understand
What is peer to peer lending? The answer is simple, it's people needing loans and people giving loans online. As an investor you simply pool with other investors to fund the loans that are available. At its core, that’s all peer to peer lending is. As a result, many investors feel p2p investments are easier to understand than many other forms of investing. The average American citizen will likely have trouble explaining what a bond is or how to begin stock trading, but handing out loans of $25 to a hand-picked group of people in need of money and earning interest from it is a rather simple concept to grasp.
#4 - You Can Set It & Forget It (Sort of...)
Both Prosper and Lending Club offer automated options for reinvesting your earnings into new loans that meet your set standards and criteria. There are also more advanced forms of automated lending you can use such as Lending Robot. When all is said and done, you can have a nearly passive investment after setting things up the way you want them to be initially.
#5 - You Can Invest Through an IRA
Investing through a Prosper or Lending Club IRA allows you to grow your investment portfolio while deferring the taxes. You can even rollover a 401(k) or invest with a SEP/Simple IRA. Considering that peer to peer lending investments are taxed the same as interest in your savings account (30% is common), investing through a retirement account can mean significant savings over time.
#6 - What Is Peer to Peer Lending Question Answered. Now What?
If you'd like to apply for a peer to peer loan without affecting your credit, you can do exactly that right here. It takes 5 minutes to apply and you can often have your loan deposited into your account electronically in less than a week.
If you'd like to get started as a peer to peer investor, find out more information about investing through Prosper Marketplace. You can open a free account with them and they are one of the biggest p2p lending companies in the world(and most trusted).
More questions about "What is Peer-to-Peer Lending"? Check out this video explaining what is peer-to-peer lending, how does peer to peer work and how to get a peer to peer loan.
If You Are Interested In Investing or Borrowing:
If you would like to apply for a peer-to-peer loan from one of the top 2 U.S. peer-to-peer lending companies you can do that here. Peer-to-peer lending is an exciting new option for borrowers and investors, to receive a loan quote from Lending Club or Prosper does not affect your credit. Choose from the options below.
- Check rates for a personal loan up to $35,000 from Avant
- Compare rates for a personal loan up to $35,000 from Lending Club
- Check rates for a business loan up to $300,000 from Lending Club
- Invest In P2P Loans Through Lending Club
Your financial opportunities have never been greater with the growth of peer-to-peer lenders in the U.S., see how you can take advantage of it today.