Peer-to-peer lending is an alternative financial service that brings lenders and borrowers together. Typically using an online platform to move funds, monies are leant from one or more members to other members to support a proposed initiative. Peer-to-peer lending avoids the traditional banking process while providing a service that benefits lenders and borrowers alike.
Peer-to-peer lending platforms allow buyers to choose a loan amount and the purpose of that loan. That information is then posted as an online listing, allowing potential lenders or investors to review the loan listing.
If an investor finds a loan that meets his or her lending requirements, then an investment may be made. Once enough funds have been raised to cover the loan, monies are distributed to the borrower. The borrower will then make fixed monthly payments until the loan has been paid off. Investors receive their money back through these repayments. The rate of return on peer lending is competitive with what investors might earn elsewhere.
Borrowers must declare the reason for the loan. Those reasons vary from platform to platform, but funds may be used for personal or business use. Sometimes for both purposes.
On the personal side, borrowers can take out a loan to consolidate debt, make home improvements, take a vacation, buy a car, pay for medical bills or for other reasons. On the business side, borrowers can use the money to launch or expand a business.
Peer-to-peer lending platforms put great importance on a person’s credit condition. Loan rates are tied to credit scores with borrowers categorized as having excellent, good, fair or poor credit.
Borrowers should confirm their credit score before applying for a loan. That information is available through MyFico.com or through the three credit reporting bureaus — Experian, Equifax and TransUnion. Closing fees are typically charged as well.
Advantages and Disadvantages
Peer-to-peer lending makes it possible for borrowers to obtain financing when traditional banking methods are not attainable. This borrowing option is initiated online through an application, and funding is usually completed within days. Funds are deposited directly into the borrower’s bank account.
Several disadvantages are present too. Not all loan rates or lending options are available to all applicants. Generally, the better your credit, the more likely you will be approved for a loan and at favorable terms.
Borrower’s names are not revealed to investors. That information is retained by the peer-to-peer lending provider. Other important information such as the borrower’s Social Security Number, current and past employers, and personal address are not revealed. Applications are made through a secured website.
Just as with traditional lending, if you are late making payments or default on your loan, that information is reported to the credit bureaus. Peer-to-peer lenders overwhelmingly lend money to individuals who already demonstrate good credit management.
For investors, there is a risk that funds invested may be lost. The industry has come under greater scrutiny in recent years with the SEC now requiring them to register their offerings as securities. Financial information about peer-to-peer lenders is posted on the respective websites and with the SEC.
See Also — Is Peer to Peer Lending Right For You?