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What is Peer to Peer Lending?

Peer-to peer lending, also known as P2P loaning, allows individual borrowers to borrow money directly from investors. This is an alternative to traditional credit and lending sources like banks and credit unions.

How Does Peer-to-Peer Lending work?

Peer-to peer lending platforms connect individual borrowers and investors. These platforms make money by charging investors and borrowers fees. LendingClub and Funding Circle are popular sites.

Let’s look closer at how you can invest in peer-to-peer lending and how to get one.

How to Invest in Peer-to-Peer Lending

You will need to create an account in a peer-to–peer lending app before you can get started.
You’ll then be able explore various loan options. P2P lending apps that are more advanced often grade loans to help you weigh risk and provide investing tools.
Next, choose an investment plan and allocate funds. You have two options: you can either finance the entire loan, or you can diversify your portfolio by financing a portion of several loans.
You can also log in to the peer to peer lending app to view your earnings and track your investments. You can then either withdraw or reinvest the profits.

How to get a peer-to-peer loan

After you have identified the type and amount of peer-to–peer loan that you are looking for, you can start to search for a P2P lending website.
Next, fill out an application online – often this will result in a soft credit screening.
After your application has been approved, you will need to examine the terms and interest rates offered by your lender.
Once you are satisfied with the terms, you may submit your loan listing to the platform. Investors will then fund it. This is typically when a hard credit review takes place.
After your peer-to–peer loan has been funded, the funds will be deposited in your bank account. You’ll need to follow the agreed repayment schedule.

Three types of peer-to-peer loans

You can get a peer to peer loan to fund almost anything. They all have financial risks that we will discuss later. There are three types of peer to peer loans. Let’s have a closer look at each.

1. Personal Peer-to–Peer Loans

Peer-to-peer loans can be used for medical bills, car purchase, debt consolidation, home improvement, vacations, or other large purchases. Peer-to-peer loans are often more flexible than traditional financial institutions.

2. Education Peer-to-Peer Loans

Peer-to-peer loans are a popular way to finance your studies. These loans are usually lump sums that let the borrower pay down their study expenses however they like.

3. Peer-to–Peer Loans for Businesses

Peer-to-peer loans are often available to small businesses in order to start or grow their business. These loans can be used for new products, marketing campaigns, and to expand the company by hiring new staff.

Peer-to-peer lending apps, which are not banks, allow businesses to submit loan requests to multiple investors simultaneously, increasing their chances of getting funded.

5 Peer-to-Peer Lending Apps in 2023

You need to select a platform that you can use to invest in peer to peer lending and get a loan. Here are five peer to peer lending apps that will help you get started.

1. Start

In 2012, the peer-to-peer lending platform was launched. Upstart’s unique approach to evaluating borrowers is part of its popularity. Upstart’s slogan is “You are more that your credit score.” Upstart considers the borrower’s academic performance, work history, potential earnings, and other factors.

2. Prosperity

Prosper has been in operation since 2005. Prosper claims that the site has been used by more than 1 million people to obtain loans and that individuals have invested over $17 billion on the platform. Prosper offers a variety of loans from debt consolidation to medical bills.

3. SoFi

SoFi is short for “Social Finance”. This peer-to–peer lending app offers many types of loans but focuses on refinancing student loans. SoFi considers each borrower’s income and education when granting a loan. SoFi’s app allows investors to manage all their investments, including stocks and exchange-traded fund (ETFs) funds.

4. Funding Circle

Funding Circle has been in existence since 2005. It focuses on small-business loans. The peer-to-peer lending platform offers a quick 6-minute online application and can often provide funding in as little as three days. The platform has attracted more than $10 billion in investments.

5. Lending Club

Lending Club was founded in 2007. Since then, more than $50 million has been transferred through the platform. The peer-to-peer lending platform facilitates personal and business loans. The platform allows borrowers to get loans as low as $1,000. Investors can start as low as $1,000.

The Benefits and Disadvantages Of Peer-to–Peer Lending

Before investing in peer to peer lending or getting a loan from peer-to peer, there are many things you should consider.

Here’s a list of both the benefits and drawbacks of peer to peer lending for investors and borrowers.

The Benefits of Peer to-Peer Lending to Investors

You can expect a relatively high return on investment

Peer-to peer lending can offer higher returns than traditional savings accounts and investing accounts.

Prosper’s peer to peer lending platform reports that it has offered historical returns of 3.5% to 7.5%.

It’s easy to diversify your portfolio with peer-to-peer lending

It is easy to spread your capital over multiple investments using peer-to-peer lending apps to lower risk.

Instead of investing $10,000 in one loan, you could divide that money up to invest $100 in 100 loans. You would lose only $100 if the borrower defaults. Many sites let you invest as little as $25 to $50 in an individual loan.

Investors: The disadvantages of peer-to-peer lending

Peer-to-Peer Investing Can Be Time-Consuming

While investing in multiple peer to peer loans can reduce risk, it can be tedious to manage and research so many small investments.

There are also peer-to-peer lending websites that offer automatic investing. These services usually charge fees or take a percentage of your profits.

Investing in Peer-to-Peer Lending Carries Risk

There is always risk associated with investments. Ratings and credit reports can be used to assess risk but there is no guarantee that all borrowers will repay their loans.

Peer-to-peer lending is essentially the same risk as funding loans by banks. Investors can lose their investment and not all loans will be repaid.

Benefits of peer-to-peer lending for borrowers

Fixed Monthly Payments and Competitive Interest Rates

The interest rates are perhaps the greatest benefit of peer-to-peer loans to borrowers.

Peer-to-peer loans often have lower interest rates than credit unions and banks if you meet certain criteria. Peer-to-peer loans, especially when combined with debt consolidation loans, can help you save money.

Additionally, borrowers may have monthly fixed payments that are debited from the bank accounts. This provides stability and security that is not offered by many credit cards.

Peer-to-Peer Loans Can Be Very Accessible

Peer-to-peer lending apps can be flexible and will not judge borrowers according to the same criteria as banks or credit unions.

The peer to peer lending platform, for example, takes into consideration your education and income.

People who have difficulty securing loans from traditional sources might find it easier to get a peer to-peer loan.

It can be quick and simple

Peer-to-peer lending apps make it easier to apply for loans. You can find out whether you are eligible in just a few minutes and get a loan within two to three days.

While investors may see the details of your loan request, many peer-to–peer lending apps won’t reveal your personal information.

Many Peer-to-Peer Lending Apps Use Soft Credit Score Inquiries

Peer-to-peer borrowing has another advantage: many platforms use soft inquires to check your credit reports when performing pre-approval screenings. These soft inquiries won’t impact your credit score. They’re the same type that you use to check your score.

This means that you can often find out the amount of the loan and the interest rates you are eligible for without having to affect your credit score. After you accept a peer to peer loan offer, the platform will usually conduct a hard inquiry before your loan approval is granted.

Contrary to this, traditional lenders will make difficult inquiries when you apply for a loan. This can lower your score and keep your credit report on file for up two years.

Shopping around for the best deal is free

It is easy to shop around for the best deal with peer-to-peer lending because of its speed and simplicity.

Soft credit inquiries allow you to compare offers from peer-to–peer lending apps, without having to lower your credit score. This is often not possible with traditional loans.

You can also use loan comparison tools such as Experian’s Loan Referral Tool.

The disadvantages of peer-to-peer lending for Borrowers

If you miss payments, your account may be sent to collections faster

Peer-to-peer lending apps can report payment details to credit bureaus just like traditional sources of borrowing. Paying on time can improve your credit score. Late or missed payments can cause your score to drop.

Peer-to-peer lending can be faster than traditional loans to pay off overdue amounts. A missed payment can have a greater impact on your ability in the future to borrow money.

The ease of securing loans could lead to financial difficulties

Peer-to-peer loans can make it tempting to borrow more than you actually need. Peer-to-peer lending platforms may allow you to borrow more money if you are approved for a larger loan amount than you request.

Summary: Peer-to-Peer Lending

Peer-to peer lending is an alternative to traditional sources for lending and investing. Platforms facilitate this process by allowing borrowers to obtain loans from multiple investors.

These are five peer to peer lending apps for 2023.

Peer-to-peer lending has many benefits. Peer-to-peer lending can offer borrowers lower interest rates than traditional sources like banks and credit unions. It is often easier to obtain and secure loans. Investors may also see higher returns than other forms of saving and investing.

You should do your research before investing in peer to peer lending or applying to for a loan.

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Author: Thomas J Law

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