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Borrowing with Peer to Peer Lending
We’ve already had a great overview of peer to peer lending, and covered how awesome it is for investors, but today we’re going to get into borrowing with peer to peer lending. If you’re looking for a personal loan but don’t want to go to the bank, read this to find out whether borrowing with peer to peer lending is the right option for you. And, if it’s not, check out these five great alternatives to traditional loans for other options.
What is Borrowing with Peer to Peer Lending?
Peer to Peer lending platforms are websites that link borrowers directly to real human lenders. Rather than relying on a bank to fund your loan, you are asking thousands of normal people just like you to fund your loan.
The two main peer to peer lending platforms, Prosper and Lending Club, are simply the facilitators. They will do the leg work of checking your credit score, approving your loan amount, and processing your payments. They aren’t funding your loan though; your peers are funding it through small investments.
Should I try to get my Loan with Peer to Peer Lending?
Borrowing with peer to peer lending is a great option for a few different types of borrowers. Lending Club offers loans to those with credit scores as low as 600, so they are a great option for borrowers with lower credit scores who may not be able to get a traditional loan elsewhere. Paying this loan on time and according to the terms will also help you build your credit!
Peer to peer lending is also great for borrowers who are looking to consolidate their debt. Both platforms, Lending Club and Prosper, offer competitive interest rates for borrowers with good credit. These platforms can be great options for those who are looking to consolidate into a single payment with a lower interest rate.
There are all sorts of reasons why people chose peer to peer lending for their needs, so whether you should really is up to you. There are advantages and disadvantages to it, just like any other platform.
What are the Advantages to Borrowing with Peer to Peer Lending?
A huge advantage of peer to peer lending is that it isn’t a traditional bank. A lot of people are tired of dealing with the traditional lending models, and want something a little different. Peer to peer lending is a great option for that.
Another great advantage to peer to peer lending is that their rates are pretty competitive. The rates range from a little over 6% for the most well qualified borrowers, up to 35% or more for the least qualified. That does seem like a huge rate, and it is, but remember they are giving folks with lower credit scores a chance with no collateral.
Are There Any Disadvantages to Borrowing on Peer to Peer Platforms?
The biggest disadvantage to borrowing with peer to peer lending is that your loan may not get fully funded. Let’s say you need ten thousand dollars for a home-improvement project. If you were approved for a traditional bank loan, the bank would cut you a check for the ten-grand. That’s not the case with peer to peer lending.
Instead, once you get approved, your loan opportunity goes into a pool for individual investors to select from. They can invest in as little as $25 increments! That’s great for the investors, as it diversifies risk. But it also means that your loan may not get fully funded. You might only get eight out of the ten thousand that you needed, and you might even get less.
As far as I can see, that is the only real disadvantage to borrowing with peer to peer lending. Everything else (interest rates, loan terms, funding fees) are either in-line with traditional loans or cheaper.
Does Peer to Peer Lending Affect my Credit Score?
Like any loan, borrowing with peer to peer lending will affect your credit score. It will count as a credit inquiry when you initially apply, and all peer to peer lending platforms report to credit agencies. That means if you pay on time and according to the terms, your score should improve, but if you miss a payment you may see a decrease in your credit score.
Is Peer to Peer Lending Safe?
Peer to peer lending is incredibly safe for borrowers. The only risk is the same risk inherent in all loans – that if you don’t pay it according to the terms your credit score will be affected.
There are limitations for investing with peer to peer lending based on where you live, but there are far fewer restriction to borrowing. Lending club is open to everyone except residents of Iowa and West Virginia, and Prosper only excludes Iowa, Maine, and North Dakota. Check out this map for more details on exclusions.
Which Peer to Peer Lending Site is Best?
There are only two traditional peer to peer lending sites, Prosper and Lending Club. There are only minimal differences between the two platforms. If you have a lower credit score, Lending club is more likely to approve your loan application. The interest rates and fees are comparable, but the final cost is dependent upon your individual situation. Both sites offer a maximum loan amount of forty thousand dollars, and both allow either three or five-year payment plans.
For a full comparison of which site might be best for you, check out this side by side from Nerd Wallet. As you can see, they are very similar in most regards. Lending club is best for those with lower credit scores, while Prosper is better for those with more debt. If you are interested in getting a loan with peer to peer lending, you should examine both options. One might give you a better deal for your specific circumstances.
Ready to Get a Loan?
If you are looking for a loan, peer to peer lending is a great option. Check out Prosper today to see if it meets your needs.
Melanie launched Partners in Fire in 2017 to document her quest for financial independence with a mix of finance, fun, and solving the world’s problems. She’s self educated in personal finance and passionate about fighting systematic problems that prevent others from achieving their own financial goals. She also loves travel, anthropology, gaming and her cats.