Peer-to-peer lending, sometimes called P2P lending, allows a borrower to take out a loan from an investor rather than a traditional bank. With flexible credit requirements and streamlined underwriting processes, peer-to-peer loans may be a good option if you wouldn’t otherwise qualify for financing or need money quickly.
These loans are also gaining popularity. U.S.-based peer-to-peer lending platforms provided more than $48 billion in consumer loans from 2006 to 2018, and they’re expected to originate $150 billion per year by 2025.
Here’s what to know about this loan alternative.
|
|||||
|
|||||
|
|
|||||
|
|||||
|
Before You Apply:
Minimum FICO credit score: undisclosed
Loan amounts: $1,000 to $250,000
Repayment terms: up to 144 months
BBB rating: A
Best Features
-
Prospective borrowers can match with loan options within 60 seconds.
-
Loans available up to $250,000.
-
Searching loan options on Fiona doesn’t impact your credit score.
Best for FICO scores between 580 and 669
Before You Apply
- Minimum FICO credit score: 580
- Loan amounts: From $2,000 to $36,500
- Repayment terms: up to 60 months
- Better Business Bureau rating: A+
Best Features
-
Receive loan funds as soon as the next business day after approval.
-
Qualify for a personal loan with fair credit.
-
Prequalify with a soft pull that won’t harm credit.
-
Prepay your loan with no penalties and change your payment due date.
Best for peer-to-peer loans of up to $40,000
Lender Highlights
- Minimum FICO credit score: 640
- Loan amounts: $2,000 to $40,000
- Repayment terms: up to 60 months
- Better Business Bureau rating: A+
Best Features
-
Prosper offers preapproval with a soft credit check.
-
Small-dollar loans of $2,000 or more are available.
-
Joint personal loans are available.
Best for peer-to-peer loans of up to $25,000
Before You Apply
- Minimum FICO credit score: 600
- Loan amounts: $4,000 to $25,000
- Repayment terms: up to 36 months
- Better Business Bureau rating: A+
Best Features
-
Some borrowers with fair credit may qualify.
-
Borrowers can complete the entire loan process online.
A peer-to-peer loan is usually a personal loan funded by investors instead of financial institutions such as banks or credit unions. Some lenders may work with small businesses.
P2P loans are available through online marketplaces that match borrowers with investors. Some well-known marketplaces include Prosper, Upstart and Peerform.
When you submit a loan application, the marketplace reviews it, handles underwriting and assigns a risk category that determines the rate. Investors can choose to fund loans, and you can review offers and accept one.
The marketplace handles all aspects of the loan, including determining eligibility, setting rates and collecting payments.
- They have flexible qualification requirements. P2P marketplaces are usually open to everyone, including borrowers with short credit histories, low credit scores or high debt-to-income ratios. Marketplaces can offer more flexibility because they “don’t necessarily hold the risk; they are matchmakers,” says Rutger van Faassen, innovation and new markets, industry ecosystems executive at Curinos, which provides data intelligence to financial institutions. “As long as they can find investors who are willing to take on that risk, they’re willing to put it out there.”
- Many lenders offer prequalification. You can often access prequalification tools that use a soft credit pull to check your chances of approval and estimate terms. The soft inquiry means your credit won’t take a hit while you shop around for a loan.
- You could find good deals on rates. If you have a strong credit history, you may qualify for lower rates than what traditional lenders offer. Annual percentage rates on peer-to-peer loans range from 6.4% to 36%, with a median of 17.1%, according to the Federal Deposit Insurance Corp.
- You can get quick cash. Compared with some traditional lenders, “Peer-to-peer lenders have a much better streamlined process for borrowers to get to money, usually within a day or so,” van Faassen says. “The traditional banking system has always been slower, and there’s more paperwork.”
- You can use the loan to build credit. Making on-time payments to your peer-to-peer lender can help you build a credit history and could boost your credit score. Most marketplaces report your payments to the credit bureaus, but double-check before you apply for a loan.
- Some restrictions apply. Marketplaces may restrict how you can use the money. For example, you may not be able to use it to pay for college.
- Your credit score may temporarily dip. The hard inquiry when you apply for the loan will appear on your credit report and may cause a small drop in your credit score. The new debt also appears on your report and increases your credit utilization, which can affect your score.
- The loan might not get fully funded. If the marketplace can’t find enough willing investors, it may cancel or only partially fund the loan.
- P2P lenders offer fewer financial hardship options than traditional lenders. If you take out a P2P loan but later can’t make your monthly payments, “Very often, whomever is servicing the loan doesn’t have options – or few options – to help that consumer,” says Jim Triggs, president and CEO of Money Management International, a nonprofit credit counseling agency. “Potentially several different investors would have to agree on modified loan terms.”
- You could pay an origination fee. Origination fees cover the costs of processing a loan, and they typically range from 1% to 8% of the loan amount. A $5,000 loan with an 8% origination fee, for instance, would mean paying an extra $400 or deducting it from the loan proceeds.
Peer-to-Peer Loans Compared With Other Loans
The biggest difference between a peer-to-peer loan and a traditional personal loan is how the loan is funded. “A traditional bank has deposits and uses that money to lend,” van Faassen says. “A peer-to-peer lender is a matchmaking business where they match the loan to someone who wants to invest in it.”
P2P lenders might have looser underwriting criteria compared with traditional banks, and nearly all P2P loans are unsecured, meaning you won’t have to put down collateral to take out the loan. Depending on the marketplace, you may or may not be able to apply with a co-signer.
Generally, most of the differences between peer-to-peer loans and personal loans are behind the scenes. Borrowers follow the same processes: Submit an application, wait for a response, go through underwriting and receive funding if approved.
The two processes are so similar that “Consumers may not even realize their loan is a peer-to-peer loan,” Triggs says, although the lender must disclose that fact.
Peer-to-peer loans and traditional personal loans have a few key differences, but they also share some similarities:
| Peer-to-peer personal loans | Traditional personal loans | |
| Who funds the loan? | Investors | Traditional financial institutions such as banks, credit unions and online lenders |
| Where are they available? | Peer-to-peer lending marketplaces | Traditional financial institutions |
| Are the loans unsecured or secured? | Typically limited to unsecured loans | Unsecured and secured loans available |
| Credit requirements | Many marketplaces lend to borrowers with lower credit scores – at least 580 – and shorter credit histories | Most lenders require good or excellent credit |
| Can I apply with a co-signer? | May be able to apply with a co-signer, depending on the lender | May be able to apply with a co-signer, depending on the lender |
| Can I get prequalified? | Prequalification usually available | Prequalification usually available |
| Does it help build credit? | Yes, if the lender reports to the credit bureaus, and most do | Yes, if the lender reports to the credit bureaus, and most do |
Check out peer-to-peer lending marketplaces if you are looking for a personal loan and you:
- Need funds quickly. When borrowers need money in a few days, “Usually what we find is people say speed is more important than the best price,” van Faassen says. A peer-to-peer loan can be a good solution because you get your money faster than a traditional personal loan.
- Have less-than-perfect credit. If you don’t qualify for a personal loan from traditional financial institutions, you might have better luck on a P2P marketplace.
- Are looking for a good deal. Borrowers with strong credit should shop around for the best rates with several types of lenders, including P2P lenders. Some say their streamlined processes and lower overhead allow them to offer the lowest rates compared with traditional banks and credit unions.
Can You Get a P2P Loan With Bad Credit?
P2P marketplaces generally lend money to people with fair or better credit, which translates to a score of at least 580. If your credit score is lower, you may not be able to get a P2P loan.
Shopping around and getting prequalified can help you find a P2P marketplace that offers loans to borrowers with poor credit. But your interest rate may be high if you have credit blemishes or are tagged as high risk.
“As the credit risk rises due to delinquencies or other derogatory credit report factors, the terms of the loan get worse,” Triggs says.
Peer-to-peer loans have potential pitfalls such as origination fees and high interest rates for some borrowers.
“But overall, they are a safe lending instrument for consumers,” Triggs says.
P2P platforms should safeguard your personal and financial information as a traditional lender would.
You might be nervous that you aren’t borrowing from a traditional financial institution, but investors and not borrowers take on the most risk. When borrowers don’t repay loans and they default, investors likely won’t get their money back.
Do your due diligence as you would with a traditional bank or online lender. Before applying for a P2P loan, check third-party reviews on the marketplace lender, “especially if something sounds too good to be true or it’s not a well-known company,” Triggs says.
Shopping around and prequalifying with multiple lenders is a good idea to help you find the best peer-to-peer lenders for your financial situation. When you’re evaluating lenders, look at:
- Loan restrictions. How will you use the P2P loan, and does the lender allow that purpose?
- Loan amount. This varies with each lender and may range from about $1,000 to $40,000 or more. Your creditworthiness will affect how much you can borrow. If minimum or maximum loan amounts don’t work for your needs, you may need to check out a different marketplace.
- Qualification requirements. Check the marketplace’s minimum credit score, income and DTI ratio requirements. Researching the lender or prequalifying can help you see whether you meet those thresholds before applying.
- Fees. Does the marketplace charge origination fees, late fees or other fees? Fees increase the costs of borrowing, but you might find a lender that limits them.
- Loan terms. Each marketplace also offers different repayment terms, usually between three to six years. A longer loan term comes with a lower monthly payment but higher interest costs. If you think you’ll pay down the loan early, then look for lenders that don’t charge prepayment penalties.
- Interest rates. A peer-to-peer lender may advertise a certain APR range, but your creditworthiness influences your rate. One lender may offer you a lower rate than others, which can help you save money over the loan term.
P2P marketplaces not only can help borrowers, but also investors, who may use the loans to earn money and diversify their portfolios.
An investor could see a return of 2% to 6% or more, depending on the size and length of the investment and the risk profile of the borrower. Prosper, one of the largest P2P marketplaces, says its historical return is an average of 5.5%.
When you’re ready to begin, you will apply to become an investor on a peer-to-peer lending platform. Once you are approved, you will deposit money into your account, and those funds can be used to lend to qualified borrowers.
You can start reviewing loan applications and borrower risk grades, and then choose the loan you would like to fund. Usually you can provide the full loan amount or a portion of it.
As the borrower makes payments, you can track your earnings and either cash them out or reinvest.
Some of the benefits of investing in peer-to-peer loans include:
- Portfolio diversification. You might consider taking on a few investments beyond your retirement accounts to reduce risk and manage volatility.
- Low minimum buy-in. You might be able to start investing with a small amount of money. For instance, Prosper requires a minimum investment of $25.
Some of the drawbacks of being a P2P investor are:
- Taking on risk. The P2P marketplace doesn’t guarantee that borrowers will repay their loans. You may lose some or all of your money, especially if a defaulted loan is unsecured.
- Giving up a cut of profits. Some peer-to-peer lending sites charge fees or take a portion of your earnings. You’ll need to research these costs and know what you can tolerate.
Advertising Disclosure: Some of the loan offers on this site are from companies
who are advertising clients of U.S. News. Advertising considerations may impact
where offers appear on the site but do not affect any editorial decisions,
such as which loan products we write about and how we evaluate them. This site
does not include all loan companies or all loan offers available in the marketplace.
More News
If You Deposit a Lot of Cash, Does Your Bank Report It to the Government?
Avianca Airlines Announces U.S. Credit Cards With American Express
What Is an FHA Appraisal?