P2P Loans: Overview

How to Borrow with P2P

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Person to person loans (or P2P loans) are loans between two or more people. Most people borrow from traditional lenders like banks, credit unions, and finance companies, but P2P loans give you more options.

What is P2P?

P2P loans have changed the world of lending. In the broadest sense, a P2P loan can happen between any two people (such as money you borrow from friends and family). But the term usually refers to loans from an online P2P lending service.

Over the years, numerous websites have made these loans widely available. Prosper.com was one of the pioneers, but there are plenty of others – and new lenders appear regularly.

Why use Person to Person Loans?

You might wonder why you’d try a P2P lender instead of your bank. P2P loans can help with two of the biggest challenges borrowers face: cost and approval.

Lower costs: P2P loans are often less expensive than loans available from traditional lenders, including some online lenders. Application fees are reasonable, and low fixed interest rates help to keep your borrowing costs down. Instead of choosing from a few brick-and-mortar institutions in your town, you’ve got a much larger pool of potential lenders. Plus, P2P lenders don’t have the same overhead costs as traditional lenders.

Getting approved: some lenders only want to work with people who have good credit and debt-to-income ratios.

But P2P lenders are often more willing to work with borrowers who’ve had problems in the past or who are in the process of building credit for the first time in their lives.

How it Works

Each P2P lender is different, but the idea is that there are lots of people out there with money to lend, and they’re looking for borrowers.

These individuals would like to earn more than they can get from a savings account, and they’re willing to make reasonable loans. P2P sites serve as marketplaces to connect borrowers and lenders (Prosper.com modeled itself after an “eBay for loans”).

Qualifying: To borrow, you generally need decent – but not perfect – credit. Again, different services have different requirements, and lenders can also set limits on how much risk they’re willing to take. As always, better credit scores mean lower interest rates.

Applying: With most lenders, you simply fill out an application as with any other loan. In some cases, you’ll provide a personal narrative (telling lenders about yourself and your plans for the money), and you can use social networks to help you get approved. Funding might be more or less instant, or it could take a few days for investors to decide to fund your loan.

Repayment: If you get a loan, you’ll generally repay over a period of three to five years, but you can usually prepay without any penalty. Payments come out of your checking account automatically (unless you set up something different), so the process is effortless.

Credit reporting: as you repay your loan, you’ll build credit (most lenders report your activity to credit bureaus), which should help you borrow on better terms in the future.

Of course, if payments come late or you default on the loan, your credit will suffer – so make it a priority and communicate with your lender if you fall on hard times.

Lenders: there are several P2P lenders to choose from, and more open up shop every year. Two of the oldest lending networks include Prosper.com and Lending Club.

The original P2P lenders funded your loan from other individuals. Now, the space is evolving and some loans are funded by financial institutions – directly or indirectly – instead of individuals. If that matters to you (you might not care – as long as you’re getting a loan from somebody), research the service you’re thinking of using and find out where funding comes from.