Peer-to-peer lending, or P2P lending, is lending money to businesses and individuals online through platforms that connect borrowers with lenders. P2P lending is also known as “social lending,” “debt-based crowdfunding,” or “crowdlending.”¹
What is Peer to Peer Lending?
A peer-to-peer loan is when an individual borrows money directly from another individual. This is often done through online peer-to-peer platforms that facilitate the operation by incorporating features that help the lender evaluate prospective borrowers.
Lenders can screen potential borrowers after assessing their credit history and the conditions of the loan they require. The minimum credit score set by these lenders is generally in the mid-600 range.² P2P lenders act as investors who decide to put money into many different loans to constitute a “portfolio” of loans that generate earnings through periodic interest payments.
Peer-to-peer loans have become a popular alternative for individuals and businesses seeking online funding. P2P personal loans can be used for many different purposes, including financing small expenses, paying for a new car, or even paying college tuition.
Average P2P Loan Terms
If you are considering applying for P2P personal loans, it’s important to know the average loan terms you can expect to get.
Criteria | Average Terms |
Loan Amount | $1,000 to $40,000 |
Interest Rate | 4% to 35% |
Loan Term | 3 to 5 years |
Origination Fee | 1% to 6% of the loan amount |
Minimum Credit Score | Usually 600 or above |
Approval Time | Few hours to a few business days |
Funding Time | 1 to 7 business days |
Repayment Options | Monthly |
Prepayment Penalty | Usually none |
Late Payment Fee | Varies, often a flat fee or % of payment missed |
Default Rate | Around 4.52% (as of 2017) |
*Please note that these are general figures and can vary depending on the lender, your credit score, and other factors.
How Does P2P Lending Work?
There are two perspectives of peer-to-peer lending: the investor’s perspective and the borrower’s perspective.
How Does P2P Lending Work for Investors?
Investors who engage in peer-to-peer lending become active lenders in the platform they pick. They can usually choose from many prospective borrowers looking for funding. They are responsible for assessing the borrower’s creditworthiness, their reputation on the platform, and their overall financial situation to pick the proposals that fit the investor’s preferences.
If the investor is risk-averse, he or she will probably pick borrowers with a solid credit history, a high credit score, and a good track record of positive experiences on the platform. On the other hand, if the lender is inclined to invest in riskier opportunities, they may reduce the strictness of their criteria. The returns obtained on riskier loans are commonly higher than those on more conservative ones, as a higher rate applies to candidates who are perceived as riskier.
The main risk for those who invest in P2P loans is potential default. In this sense, certain P2P platforms have reported that the average default rate on these loans was around 4.52% in 2017.
How Do Peer-to-Peer Loans Work for Borrowers?
Individuals and businesses can easily borrow money through P2P loan platforms by creating an account online and applying for the loan they intend to obtain.
They must provide certain information required by the system, including:
- Their personal information, including their Social Security Number (SSN)
- Their credit information, including credit scores
- Employment information
- Other relevant financial information
Types of Peer-to-Peer Loans
Borrowers can apply for different types of peer-to-peer loans, and the interest rate associated with these loans varies depending on the borrower’s credit situation.
Some installment loans offered by P2P platforms include:
Personal Loans
Personal loans are installment loans that borrowers can use for almost any expense. Borrowers repay their personal loans on a monthly basis for a specific amount of time, typically between a few months and several years.
Fees vary by lender, but most personal loans have origination fees. An origination fee usually covers the cost of processing and funding your loan.
Personal loans tend to have flexible credit requirements, so bad credit borrowers could qualify! But keep in mind that online lenders and traditional banks may offer higher personal loan amounts than P2P lenders. If you need a large loan, you may not get enough money with personal loans from a P2P lender.
Debt Consolidation Loans
Debt consolidation loans generally provide large sums of money so borrowers can consolidate their debt. One loan account instead of several can help borrowers stay on top of their repayment schedule.
When you avoid late payments, your bad credit history improves, and you may notice an increase in your FICO score over time. A debt consolidation loan may also help a borrower save money if they qualify for a lower rate.
Home Improvement Loans
A home improvement loan is for small and large-scale renovation projects. Homeowners can use home improvement loans to improve their living conditions and increase the value of their home. Home improvement loans can provide more than enough loan funds, but you will have to meet the credit requirements set by the P2P lender.
Bad Credit Loans
Bad credit loans are loans for borrowers who have bad credit. Bad credit can make it challenging for someone to get emergency money right when they need it.
However, bad credit loans can provide loan funds quickly at the cost of high-interest rates and fees. High loan fees can make repayment hard, which can result in default. If you default on a loan, you could further decrease an already bad credit score. Always explore all of your loan options before settling for bad credit business loans, bad credit personal loans, etc.
The Main Benefits of P2P Lending
The benefits of peer-to-peer lending vary for both investors and borrowers. These are some of the most relevant advantages.
Benefits of P2P Loans for Borrowers
- Low-interest rates: With interest rates usually starting at 4% for individuals with a good credit score, peer-to-peer loans are less expensive than other alternatives and, in some cases, even less expensive than the alternatives offered by traditional lenders.
- Easy application process: Since P2P platforms operate 100% online, the application process is usually very straightforward, as it mainly requires that the borrower supply basic personal and financial information to start participating in the platform.
- Credit scores are not as important: Most traditional lenders require credit scores above 660 for borrowers to be eligible for a personal loan. In this sense, peer-to-peer loans are usually more flexible, as some lenders might be interested in extending loans to individuals with lower credit scores due to the higher interest rates charged on these loans.
Benefits of P2P Loans for Investors
- Portfolio diversification — High net-worth individuals and institutions may use P2P platforms as an alternative investment to traditional financial instruments, such as stocks, bonds, or commodities. Considering that these instruments behave in a unique way, they can provide a positive degree of diversification for investment portfolios.
- Good returns on investment — The median return earned by P2P loan investors has been estimated at 4.6% per year. Even though the risks involved in lending must be considered, the returns vary depending on the degree of risk associated with the borrower’s credit profile and financial situation.
P2P Lending Regulations
The largest P2P markets in the world are China, the United Kingdom, and the United States. Each country’s industry is regulated differently, as the business model is relatively new. Many regulators are racing to bring order to the market to increase its transparency and safety for both borrowers and investors.
In the United States, there are essentially four players involved in regulating P2P platforms.
The Securities and Exchange Commission (SEC)
The SEC is mainly in charge of overseeing the relationship between investors and security issuers, along with the facilitators that allow the investment operation. From the perspective of P2P lending, the SEC regulates how investors relate with borrowers.
The SEC has established that investors cannot be compensated directly for issuing a loan to borrowers through a peer-to-peer platform. Instead, the loan must be issued by a bank, and the investor becomes a security holder who is entitled to receive the interest payments.
The Consumer Financial Protection Bureau (CFPB)
The CFPB regulates how financial products and services are offered to consumers to protect them from potentially fraudulent operations and scams. They are also in charge of educating consumers to help them understand how P2P lending platforms should work. Although the CFPB does not directly regulate peer-to-peer lending, they carefully review the practices associated with P2P lending to ensure fairness and transparency in this market.
The Federal Trade Commission (FTC)
The FTC intends to promote a fair environment for consumers by protecting them from deceptive practices in the marketplace. More specifically, the FTC regulates how financial products and services are offered and marketed to ensure that the terms and conditions offered by P2P platforms are in line with the expectations and results that borrowers receive from their services.
State Laws and Regulations
In the United States, lending licenses are commonly granted to companies on a state-by-state basis. This means that lenders must apply for a lending license to offer their products in each state. This is a challenge for P2P platforms, which usually intend to operate throughout the country.
Many P2P lending companies have partnered with large banks to provide their services to most states. Currently, Texas, Ohio, and some other states don’t allow P2P lenders to operate or issue loans in their states.
What is the Cost of Borrowing Through P2P Lending?
The cost of borrowing a P2P loan includes the interest rate associated with the loan, along with other loan fees and expenses. Some of the most common fees applied to peer-to-peer loans are:
- Origination Fees: Origination fees are flat percentages collected on the nominal value of the loan. An origination fee is usually deducted from the amount transferred to the borrower. The origination fee can also be added to the outstanding loan balance.
- Prepayment Penalties: If the borrower wishes to pay for the partial or total amount of the outstanding balance of the debt before it is due, the P2P lending platform may charge a penalty. This penalty is waived by some platforms.
- Late Payment Fees: The platform may charge a late payment fee if the borrower fails to make installments on time.
- Servicing Fee: This is a fee often charged to investors, not borrowers, and it is usually paid monthly or annually for using the platform’s services. It can be a fixed fee or a percentage fee based on the average funds invested.
The cost of borrowing a peer-to-peer loan is usually expressed through what’s known as the annual percentage rate (APR), which is a calculation of the annual cost of borrowing the loan considering other fees, commissions, and expenses, along with the applicable interest rate.
The cost of borrowing a peer-to-peer loan varies depending on the borrower’s credit profile and financial situation. Most P2P lending platforms require that borrowers have a credit score higher than 600 to be considered eligible, and they must also reside in a state where the lending platform is authorized to operate.
Frequently Asked Questions About Peer-to-Peer Lending
What is the minimum credit score requirement for getting a personal loan from peer-to-peer lenders?
The minimum requirement varies among different P2P lenders. Generally, a credit score of 600 or above is considered acceptable, but some platforms may offer loans to individuals with lower scores, especially those looking for bad credit loans.
How do P2P lenders compare to credit unions for personal loans?
Peer-to-peer lenders often operate entirely online, which can make the application process quicker and more convenient. Credit unions, on the other hand, may offer lower rates and more personalized service but might require you to be a member. It’s a good idea to compare both options to see which better suits your needs.
What is an origination fee, and how does it affect my loan amount?
An origination fee is a one-time charge that covers the cost of processing your loan. This fee is either deducted from the loan amount before it’s disbursed to you or added to your loan balance. Make sure to factor this into your calculations when determining how much you need to borrow.
Can I use a personal loan from a peer-to-peer lender for debt consolidation?
Yes, many people use personal loans from peer-to-peer lenders for debt consolidation. By consolidating multiple debts into a single loan with a potentially lower rate, you can simplify your payments and save money over time.
How does my credit score impact the interest rate on my loan?
Your credit score is a significant factor in determining the interest rate you’ll be offered. Generally, the higher your credit score, the lower the interest rate. If you have bad credit, you may still qualify for a loan, but the interest rate will likely be higher.
What is the maximum amount I can borrow from a peer-to-peer lender?
The maximum amount varies by lender and can range from a few thousand dollars to as much as $40,000 or more. Your eligibility for a higher loan will depend on factors like your credit score, income, and debt-to-income ratio.
Are there any alternatives if I don’t meet the minimum credit score requirement?
If you don’t meet the minimum credit score requirement, you might consider co-signing with someone who has a better credit score. Alternatively, you could look into bad credit loans or explore other lending options like credit unions, which may have more lenient credit requirements.
CreditNinja: The Bottom Line on Peer-to-Peer Lending Bad Credit
Peer-to-peer lending is an alternative option to traditional lenders. But while the credit requirements can be flexible, the rates and fees can actually be higher. When rates and fees are high, they can increase financial stress for the borrower.
At CreditNinja, we offer quick personal installment loans with competitive interest rates, flexible payment schedules, and convenient repayment terms. Apply for online loans today and see why we have so many positive reviews online!
CreditNinja provides loans, but we want to stress the importance of having a good reason to borrow money. It’s critical to avoid taking out loans unless you have a financial emergency. Limiting the amount of outstanding debt you have can help you maintain good financial health!
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