What is Peer to Peer Lending?
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Peer to peer lending is often referred to as people to people lending. Unlike your traditional lending where it happens between an individual and a bank, peer to peer lending occurs between two individuals. Peer to Peer lending can be advantageous to both lenders and borrowers.
These loans are typically easier to qualify for than loans from a bank, though normally at higher interest rates. One main advantage to the lender is receiving a much better rate of return than they would get from simply depositing their money in a bank account.
In the past, peer to peer lending would take place between friends and family members. But you may have noticed several new opportunities that exist to borrow (or lend) money from (or to) other people just like yourself. There are a number of sites online that serve to introduce lenders and borrowers. Keep reading, I'll give you a few.
Conventional sources of borrowing can sometimes be challenging, those challenges have opened the door for peer to peer lending and addressed the excess demand for borrowing.
Advantages of Peer to Peer Lending for Borrowers
Interest rate. While you should expect to pay slightly more than a bank would charge, the interest rates are usually quite good. Individual lenders don’t have the overhead that a company has to absorb.
Credit flexibility. While many individual lenders only want to deal with those with a high credit score, there is something for everyone. While every bank might turn you away, there is someone out there that is willing to lend money to you. Some things to consider about credit and peer to peer lending:
Lenders may be willing to overlook some of your bad credit, especially if they’re due to circumstances outside of your control. But they’re far less likely to overlook the fact that you're just not paying your bills on time. Remember, these individuals are lending you their life savings; it's really important that you make your payments on time.
You’ll have less privacy than you would normally have when dealing with a bank. Much of your financial information will be made available to potential lenders, so they can make informed decisions.
Advantages of Peer to Peer Lending for Lenders
Interest rate. With banks paying less than 1% on savings accounts, individuals are finding that they can earn significantly more by lending to other people. While there is more risk and research required, many investors are finding that it's still worth it.
More personal. Many lenders enjoy knowing that they are helping someone. In fact, it's not unusual that the lender knows just about everything there is to know about their potential borrowers. Many people find this more satisfying than buying a bank CD.
Special Considerations for Lenders
Typically, your funds are not insured when loaning under peer to peer circumstances. Be careful not to be taken in by a hardship story. It's natural to want to help someone in need, but try to be objective and remember that your personal funds are at risk. As with any investment, you must analyze the amount of risk involved.
With the amount of work required to do an adequate job of screening loan seekers and making bids, a good index fund might do just as well over the long-term and require much less work.
Peer to Peer Lending Platforms
Here's some of the platforms where you can become either a peer to peer borrower or a lender:
Lending Club
Borrower:
Personal loans
Borrow up to $40,000
Up to 60 year terms
6.95% - 35.89% APR with no prepayment penalties (you can pay your loan early without getting penalized)
Approval based on your credit worthiness
Application process takes 7 days
Loan deposited directly into your bank account
Can't use a personal loan for investments, gambling, education after high school, and anything illegal
Lender:
6 different account types
Minimum deposit required to open is $1,000 for an individual account
Delivers 4-7% historical returns
Get paid on principle and interest
1% annual servicing fee
Upstart
Borrower:
Personal loans
Borrow up to $50,000
3-5 year terms
4.68% - 35.99% APR with no prepayment penalties
Approval based on your credit worthiness along with educational and employment variables (such as degrees attained, school/university attended, area of study, occupation and employer)
Application process takes 1 day
Loan deposited directly into your bank account
Can use it for anything
Lender:
87.4% of their loans are paid in full
Prosper
Borrower:
Borrow between $2,000 and to $40,000
3 or 5 repayment year options
APR 7.95%–35.99%
Minimum credit score of 640 (this is not published, but it has been reported as such)
Loan deposited directly into your bank account
Not available to residents of West Virginia or Iowa
Lender:
Minimum deposit required to open is $25
Delivers 5.6% historical returns
Funding Circle
Borrower:
Small business loans
Borrow between $25,000 and to $500,000
Up to 5 year terms
4.99% APR
Loan deposited directly into your bank account
Lender:
Minimum deposit required to open is $25,000 for an individual account
Delivers 5-7% historical returns
1% annual servicing fee
Need an earned income of $200,000 and net worth of $1 million
These are just a few, you can certainly search the web for tons of other platforms that will allow you to borrow and lend money.
Final Thought
It appears that peer to peer lending is here to stay. If you’re interested in becoming involved on either the borrowing or the lending side, there are many lending networks available on the Internet. Lending between individuals has been going on for thousands of years.
Borrowers need to remember that they are borrowing money from an individual, and the failure to make payments on time affects that person directly. Lenders need to stay focused on making wise decisions with regard to risk management. Not everyone is a good risk.
When you follow these tips and precautions, you might find that peer to peer lending is just the solution you’ve been looking for!
