Peer-to-peer or P2P lenders oppose the standard lending process in which individuals apply for loans through traditional financial institutions. A P2P lender allows individuals to borrow money from other people through an online marketplace.
For people considering becoming a lender on a P2P lending platform, the main benefit is that you can get a higher return than other strategies like stock market investing or real estate investing. And for people looking to borrow money through a P2P lender, the benefit is usually less stringent credit requirements than traditional banks.
This guide will teach you everything you need to know about peer-to-peer lending.
What is Peer-to-Peer Lending?
P2P lending is a relatively new form of lending that offers investors a different way of generating returns than traditional assets like stocks and bonds. Rather than funding loans with the deep pockets of financial institutions, P2P lending is funded by individuals who sign up for accounts and select and select loans for funding.
P2P lenders and borrowers never interact directly with each other. Rather, the P2P platform acts as an intermediary between the two parties. The most common type of P2P loan is a personal or business loan.
Depending on the company, P2P lenders may be more lenient or strict on qualification standards. Many of them will limit loan amounts to around $ 40,000 to $ 50,000, which is lower than some traditional lenders.
Understand peer-to-peer lending
Some P2P lenders do not allow everyone to invest. You can require you to be an accredited investor, which is a standard set out by the Securities Exchange Commission. To qualify, you must have earned an income of $ 200,000 ($ 300,000 for joint applicants) annually in the past two years, or have a net worth or combined net worth of US $ 1 million or more. You don’t need to apply for or fill out a form to become an accredited investor, but the lender must do their due diligence and ensure that they only accept investors who qualify under these SEC standards.
From a lender’s perspective, P2P lending is a bit like setting up an online dating profile. You set up an account, deposit funds into your account, and then decide what to look for in a potential borrower. You can decide whether to invest in high-risk, high-yielding loans that produce better returns or low-risk, lower-interest loans that can produce lower, but more reliable, returns. You choose loans to fund based on their risk profile set by the lender and you don’t interact with individual borrowers.
From the borrower’s point of view, they are assigned to certain risk categories that are determined by the lender. The risk categories, based on factors such as the amount requested, credit history, and income, help potential lenders decide which borrowers to loan to. Each lending platform has its own method of determining borrower categories. Some may allow borrowers and lenders to negotiate interest rates and loan terms, but that varies.
P2P lenders are similar in some key ways to traditional lenders. In general, the better your credit rating, the lower the interest rate you will get. P2P lenders also require an income and credit history review in order for your loan to be approved. If you default on your loan, both traditional and P2P lenders will send your debt to collection agencies.
What to Consider Before Getting a Peer-to-Peer Loan Loan
The two big advantages of P2P lending for borrowers are that loans can be funded extremely quickly compared to traditional loans, and P2P lenders are more likely to work with borrowers who do not have the best credit profiles.
Before you dive headlong into P2P lending, keep in mind that these can be more expensive than other types of loans. Check the loans for fees and compare the interest rates with other lenders before signing up.
Peer-to-Peer Lending Firms
The most common types of P2P companies are personal and business loans. Here is a quick rundown of three lenders to help you find the right lender for your needs. Be sure to shop with multiple lenders and compare prices and fees to find the best solution for you.
Upstart offers loans of up to $ 50,000. Not only will the lender check your creditworthiness to determine your eligibility – Upstart will also consider your professional history and even your education. Upstart allows potential borrowers to check their interest rates before applying, which requires a gentle loan application that does not affect creditworthiness. You need a credit score of 600 to qualify as a borrower. To become an investor, send an email to [email protected]
Prosper was the first official peer-to-peer lender in the US and has been in business for nearly two decades. The lender is offering up to $ 40,000 on personal loans and the only way to check your interest rate is with a soft loan query on their website. Prosper offers financing in just one business day and offers repayment terms of three to five years. Investors can register directly through the website.
Funding Circle is a leading P2P small business lender. It offers business loans between $ 25,000 and $ 500,000 and terms of up to 10 years. Prices start at 4.99%. Investors must apply to become an investor using the Funding Circle website form.