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Peer to Peer Lending is the practice of lending money to individuals and businesses through online marketplaces that match borrowers with lenders. Peer to Peer Lending (P2P) is considered an alternative method of financing and has grown dramatically in popularity since its introduction in the United States in 2005.
Because most P2P companies operate online, overhead is lower with the traditional financial institution eliminated as middleman. This scenario frequently leads to lower interest rates for borrowers, as well as the opportunity for lenders to earn more than they otherwise would through traditional products offered by banks such as savings accounts and CDs. So, how does peer to peer lending work, and is it a good idea for you? Let’s take a closer look.
More Peer to Peer Lending Information
Peer to Peer Lending websites connect borrowers directly to investors – who actually act as the lenders. Lending Club is the largest P2P platform worldwide and in the United States based upon loan volume and revenue, having loaned over $35 billion since inception.
Prosper was actually the first P2P lender, and have arranged for over $15 billion in borrowings since inception. These two leading P2P lending platforms are examples of online lending marketplaces that connect borrowers directly to investors while setting the rates and terms of the loan transaction. They develop credit models for loan approvals and perform credit checks on potential borrowers after verifying their identity and qualifying financial data.
P2P marketplaces also process payments from borrowers before transferring them to the lender investors while providing any necessary additional customer service. All of this is done for a fee, of course, as P2P lending platforms are for-profit enterprises. The beauty of the P2P lending model, however, is that even after accounting for fees, most borrowers and lenders receive better outcomes than they would from a traditional bank or financial institution.
How Does Peer to Peer Lending Work?
Most P2P lending websites offer a wide range of products and interest rates dependent upon the creditworthiness of the potential borrower. To begin with, an investor (lender) opens an account and funds it with money that will be allocated in a loan or loans.
Meantime a potential borrower completes a profile that helps determine degree of creditworthiness and ultimately the interest rate that the borrower will pay. After reviewing various loan offers available based on the loan applicant’s risk category, the borrower can accept an offer and receive funds through the lending platform, which will also manage all monthly payments.
Originally developed for borrowers with weaker credit profiles who had difficulty receiving loans from banks, P2P lending has become a convenient source of funding for those seeking to consolidate high-interest rate credit card debt and student loans, and in recent years has expanded into auto financing and home improvement loans.
Peer to Peer Lending Platforms
If you are interested in learning more about specific peer to peer lending platforms, there are several established companies to consider. The two platforms mentioned earlier, LendingClub.com and Prosper.com are good places to start.
Lending Club offers fixed-rate personal loans of up to $40,000 and business loans as large as $300,000 for up to five years. Lender investors can get started on the site with as little as $1,000.
Prosper offers fixed-rate loans for three to five years and allows potential borrowers to see the interest rate they would pay on the site without causing any impact to their credit rating. At Upstart.com, loans of up to $50,000 are available with terms of three to five years and carry no prepayment penalty. When evaluating creditworthiness of potential borrowers, Upstart also looks into job history, educational background and field of study.
Upstart’s extra diligence in qualifying borrowers has led to a substantially lower loan default rate that is 25% of the default rate at traditional banks, making them an attractive platform for lender investors. Additionally, Upstart offers investors the option of setting up an IRA on the site.
More Peer to Peer Lending Platforms
Peerform.com offers unsecured personal loans of up to $25,000 with fixed rates as low as 5.99% to qualified borrowers. On Peerform, investor lenders can spread their money out by allocating funds to potential borrowers among sixteen different risk categories through “fractional loans” that become part of the full loan granted to the borrower.
On the other end of the spectrum, if you are running a small business or are a high net worth individual seeking a loan of $25,000 to $500,000, FundingCircle.com could be the P2P marketplace for you. With rates as low as 4.99% and terms ranging from six months to five years, Funding Circle has garnered an A+ rating from the Better Business Bureau and was designated “Best Small Business Loan for Low APR” by U.S. News and World Report in April 2019.
Finally, over at Streetshares.com, small business owners can receive loans of up to $100,000 for durations of up to three years. Streetshares also caters to U.S. military veterans, so if you’re a military veteran or an investor with up to $500,000 to loan who wants to help war veterans while earning a flat 5% interest on your money each year, Streetshares is worth investigating.
About The Author: Steven Brachman
Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.