Learn About Peer To Peer Lending
Many life events may require you to get extra money quickly. For example, you may suddenly need to purchase a new home or vehicle. Alternatively, you may seek to start your own business and need some initial startup funds. You might also seek some type of loan to help you pay off existing debts, such as student loans. If you need funds for one of those reasons or any other purpose, you may think of a traditional loan, first. However, a traditional loan is not always your best option.
One alternative to a traditional loan is peer-to-peer (P2P) lending. You can explore peer-to-peer lending options when traditional loan parameters do not appeal to you. If you cannot qualify for a traditional loan at all, peer-to-peer lending may also help you get the funds you need quickly. Learning how peer-to-peer loans work can help you determine if getting one is the right step for you to take.
What is Peer-to-Peer Lending?
To understand peer-to-peer lending, you must first understand bank lending. A traditional bank collects funds from each of its customers. Some of that money is stored, but a lot of it is used to finance loans for other bank customers. Those may include home loans and personal loans of various types. Loan applicants must typically pay back those loans within a certain time frame, and they often come with high interest rates.
P2P lending is a type of financing that eliminates the need for banks. It is sometimes called crowd or social lending. It uses various online platforms to allow borrowers and lenders to connect. Lenders view profiles of potential borrowers to determine risk factors and comfort levels. If lenders approve of certain borrowers, loan terms are established. Those terms include the length of the loan period and the interest rate.
What Are Some Peer-to-Peer Lending Benefits?
P2P lending has several potential benefits for borrowers and lenders. Borrowers can often get lower interest rates than are available through banks or credit unions. Also, high credit scores are not necessarily required to qualify for peer-to-peer loans. Although higher scores can help borrowers get lower interest rates, in some cases. When money is borrowed, there are typically no restrictions on how it is spent. Often, there are also no penalties for paying it back early.
The appeal of peer-to-peer loans for lenders largely stems from the greater potential for a high rate of return on their investments. Bonds and other options are often less financially beneficial. Peer-to-peer lending also allows lenders to personally assess borrowers. The lenders choose the specific borrowers who meet their standards. That is in contrast to banks lending out money on behalf of customers to borrowers the lending customers have not personally assessed.
What Are the Cons of Peer-to-Peer Lending?
Not everything about peer-to-peer lending is positive. The process does have some potential disadvantages. For borrowers, missing P2P loan payments can have serious consequences. Lower credit ratings and inability to get future loans are both risks. Also, borrowers may have to pay extra fees beyond established interest rates.
Lenders also face potential additional fees. Often, P2P platforms charge approximately one percent of each loan amount in service fees to lenders. Some platforms may charge more. Lenders also face P2P loan risks like having funds tied up for the duration of each loan. It is not possible to back out of P2P loan agreements early. Long-term loan investments can make diversifying portfolios or turning fast profits difficult for P2P lenders.
What Are Some Top Peer-to-Peer Lending Platforms?
If you are interested in becoming a P2P lender or borrower, the first step is to choose a lending platform. There are many such platforms available online. Several are also accessible via cellphone apps. They each have unique features. Here are some of the top options, as of 2022:
- Yieldstreet is a platform that provides accessible investment opportunities for investors at various income levels. In addition to P2P loans, the website also offers opportunities to invest in artwork, real estate, and other opportunities. Yieldstreet also offers sample portfolios and investment statistics to help new members get started.
- Lendstart is a platform that provides many financial tools, including P2P loan opportunities and business loans. It also offers tax relief assistance. Borrowers can benefit from the Lendstart loan calculator. It allows borrowers to estimate loan payments by entering in loan term data.
- LoansMarket provides loans for specific purposes, such as automobile or home purchases. It also provides flexible personal loans and debt consolidation options. Additionally, borrowers with bad credit can apply for LoansMarket loans specifically for borrowers with low credit scores.
- Prosper provides P2P loans without penalties for early repayment. The company focuses on helping borrowers save money through various tools and techniques. Prosper provides several resources on its website for borrowers to use to improve their finances. Those resources include budgeting tools, savings guides, and credit management assistance.
- LendingPoint provides personal and business loans. Borrowers can qualify to borrow up to $36,500, in many cases. Some borrowers may qualify to borrow more. The LendingPoint website also provides access to multiple financial health and budgeting guides.
How Do You Select a Peer-to-Peer Lending Platform?
Selecting a peer-to-peer lending platform requires you to begin by assessing your needs and desires. Certain lending platforms are geared more toward assisting lenders with building financial portfolios. Other platforms focus more on helping borrowers eliminate debt quickly. You must also consider the reputations of each lending platform. Check online reviews to determine the platforms with the best customer support. If you still need to narrow down your options, consider any special features the platforms offer. For instance, you may opt to use a platform that operates only within the United States or one that offers international loan assistance.
When Should You Use Peer-to-Peer Lending?
As a lender, you can use peer-to-peer lending at any time. It allows you to lend money easily without the need for a bank. If you are borrowing, you may opt to use it as a last resort, such as if your credit score is not high enough to get a traditional loan. In such an instance, P2P might present the best and fastest solution to help you with a major expense or allow you to consolidate your existing debts.