At a Glance
Peer-to-peer (P2P) lending, an alternative financing method that facilitates loans between individuals is gaining popularity. Here’s everything you need to know about it.
It used to be that if you needed a loan, whether to finance a big purchase like a car or for debt consolidation, you would borrow money from a bank. But you can also borrow money from individuals. It’s called peer-to-peer (P2P) lending, and it’s growing at a rapid rate. The global peer-to-peer lending market size is projected to reach $558.91 billion by 2027, according to Allied Market Research.
According to Investopedia, P2P lending was initially seen as something people who didn’t get approved for traditional loans could use to gain access to credit. But in recent years, P2P platforms have expanded their reach and target consumers who want to pay off debt at a lower interest rate, or who are looking for specialized loans like home improvement loans and auto financing. There are even small business loans.
What is peer-to-peer lending?
The premise is simple: Some people want to borrow money, others want to lend it and make a return on their investment. Peer-to-peer lending platforms connect lenders and borrowers to facilitate those transactions. There is no financial institution involved – it’s an alternative form of financing. Just like with other loans, your credit score has an impact on the interest rates that you can access – the more lenders see you as a high-risk borrower, the more interest you’ll pay. Keep in mind that it can be appealing for paying off credit card debt if you have a good enough credit score, since the rates can still be lower than the ones on your credit card.
“Investors obviously seek a good return on investment. Also, P2P lending offers the opportunity for diversification into an asset class that is not directly correlated to other asset classes (like stock). Borrowers like the offered loan terms. Not necessarily the interest rate only, but also the convenience and the reduced time it takes to get a loan,” shared Claus Lehmann, P2P lending expert, in an Investly interview.
How to get a peer-to-peer loan
Wondering how to get a peer-to-peer loan? It’s all done online, and it’s rather straightforward. Sign up on a P2P lending platform like Lending Club or Prosper. The exact steps vary depending on the platform you are using, but you will generally be required to fill out an application that involves a credit check. If approved, you will be presented with an interest rate and loan terms. Lenders can then review your loan request on the platform and decide whether to fund it. Once you are successfully matched with a lender, you’ll receive the funds and will start making payments to repay the loan based on your loan terms. There may be more than one investor financing your loan, but the platform takes care of facilitating that.
Pros and cons of peer-to-peer lending
- Interest rates may be more advantageous than banks if you have good credit.
- Lenders can also benefit from higher returns than other types of investments.
- Easy and accessible.
- Wide variety of lending/borrowing options.
- There may be hidden transaction fees.
- Higher chance of borrowers defaulting on their loans.
- Unsecured loans means less protection for both borrowers and lenders.
- Borrowers may end up paying higher interest rates than with a traditional institution depending on their credit score.
Best peer-to-peer lending platforms
Investopedia’s top three peer-to-peer providers are Prosper, MyConstant and Funding Circle.
Prosper is one of the earliest P2P marketplaces, and it has great customer reviews. It accepts joint loan applications, is accessible to borrowers with not-so-great credit, and offers quick loan disbursement.
MyConstant is best if you’re looking for crypto loans: “It allows borrowers to use their cryptocurrency holdings as collateral and borrow money at relatively low-interest rates—all without having to sell their crypto,” according to Investopedia. And it doesn’t even require a credit check.
As for Funding Circle, it’s a marketplace for small businesses – no crowdfunding or traditional financing required. It may allow you to borrow up to $500,000 to fund your entrepreneurial venture, but you do need to have very good credit.
P2P lending is only going to continue to grow. As a borrower, it can help you get a better deal while shopping around for loans – just make sure to compare interest rates and watch out for hidden fees. As an investor, it’s a unique way to grow your money, but whether it’s a good option for you depends on your risk tolerance.