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What You Need to Know about Peer-to-Peer Lending

Modern technology has simplified the lending process for both consumers and lenders. People can apply for and manage their loans over the Internet, without ever leaving their homes. Being able to apply online opens new possibilities, gives applicants access to many unconventional loan options, and allows them the opportunity to compare loan products to find the one best suited to their needs. Peer-to-peer lending, also referred to as P2P lending, is a relatively new concept in the loan marketplace, and it’s quickly gaining popularity as an alternative to traditional loan products.

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What Is Peer-to-Peer Lending?

Peer-to-peer lending is very similar to its name in that one peer is considered the lender, while the other is considered the borrower. What makes P2P lending different is that the funds come directly from an individual or small entity, rather than a large financial institution.

P2P has advantages and disadvantages both for lenders and borrowers, so no matter which side of the loan you find yourself on, it’s important to consider these pros and cons before jumping into P2P lending.

For Borrowers

Peer-to-peer lending is popular with many consumers, especially those who have faced rejection from other lenders. Rather than reject someone outright due to poor credit history, P2P lending gives applicants the chance to be seen as more than just a credit score or a series of blemishes on their credit report.

P2P lending is available to consumers for a variety of uses, from student loans to small business loans to general personal loans. In each case, applicants are encouraged to be specific about their funding requirements, how the funds will be used, and their ideal repayment terms. Though there is no guarantee of approval, the process adds a human element to financial assistance that is so often lacking in dealing with traditional banks and lending companies. Peer-to-peer lending can not only be sought for personal reasons such as paying off credit card debt or moving to a new city—it can also be a valuable tool for gathering the funds necessary to start a business or pay off student loan debt.

Two of the most popular P2P lending sites include LendingClub and Prosper, both of which seek to simplify the loan process for consumers as well as investors. LendingClub provides access to personal P2P loans up to $40,000 and business P2P loans up to $300,000. The LendingClub website offers comprehensive loan education designed to help consumers and investors make informed decisions prior to engaging in the P2P lending process. Prosper prides itself on simplifying the loan process, offering low interest rates, fixed terms, and monthly payment options. Prosper also gives consumers the opportunity to check their rate and estimated payments without any impact on their credit report.

For Investors

For investors, experts on peer-to-peer lending agree that diversifying investments is crucial for portfolio success. As interest rates continue to drop, investors are beginning to seek ways to increase earnings and profit outside of conventional avenues. Peer-to-peer lending may be a viable option because investors can hand-select who they lend to, as well as set mutually agreeable terms and interest rates.

While P2P lending can be a solid form of income-generating activity, the process is not without caveats. Since peer-to-peer lending is considered a non-traditional form of lending, applicants may have been denied by banks and other lenders due to credit or other factors. This in itself makes a P2P loan somewhat riskier for the lender, as there’s less assurance that the applicant will successfully repay the loan. This disadvantage is often mitigated by assigning a higher interest rate to the loan, and those who have been rejected by other lenders are often willing to pay higher interest in exchange for access to funds.

The Future of P2P Lending

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Though peer-to-peer lending began essentially as a one-on-one transaction between individuals sharing their unique circumstances and lending on their own terms, larger institutions have begun to find their way into the P2P lending arena. The infiltration of peer-to-peer lending by bigger banks is backed by proponents who believe that this will open up more access to funds for consumers and give investors more peace of mind in terms of successful repayment.

Those who are against the intrusion of traditional banks worry that this may change the original purpose of P2P lending, leading applicants to face the same level of scrutiny and rejection they previously encountered when seeking funds from established sources. As time goes on, it will be interesting to see how P2P lending evolves and if the original intent of this form of lending remains intact.

For those who have faced credit challenges in the past, it can be difficult to regain their footing and improve the state of their finances. Alternative loans, such as P2P loans, offer another avenue for securing needed funds—one that can be more attractive than traditional channels like banks. However, it is important to remember that taking out any kind of loan is a serious financial decision, so it is imperative to read all disclosures and fully understand the terms and conditions before inking an agreement.

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