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What is Peer to Peer Lending?

Throughout life, there's almost always a time when you're going to need some extra cash, whether that's to pay for a necessary medical expense, to remodel your home or to pay for your children's college education. When borrowing from family and friends isn't an option, you have to seek outside funding.

Not too long ago, if you needed a loan, you headed to your local bank to see what you could qualify for. While that method is still used today, it's not the only method of obtaining a loan-nor is it the best. With online lenders popping up more and more and the addition of what's known as peer to peer lending, consumers have a plethora of options when it comes to borrowing money.

Peer to Peer Lending Explained

Peer to Peer lending is the new and convenient way of borrowing money. No longer do you need to go to a bank or online company to obtain a loan, but instead you can borrow money online from your own peers (hence peer to peer lending). It's similar to borrowing or loaning money to a friend, but without the hassle and awkwardness of actually conducting a financial transaction with someone close to you.

Since peer to peer lenders don't have to pay for overhead like traditional banks do, borrowers can often get a loan with a lower interest rate and better terms. Prosper, for example, was the first peer to peer lender to hit the marketplace. Borrowers can receive up to $35,000 with fixed interest rates as low as 5.99% APR. Other peer to peer lending companies include Sofi, Upstart, Peerform and Circleback Lending.

What is Peer to Peer Lending?

Benefits of Peer to Peer Lending

Whether you're an investor or a borrower, there are many benefits to peer to peer lending. Borrowers, as mentioned above, will receive some of the lowest interest rates on their personal loans in the country. However, it's important to note that the borrowers that receive the best rates have outstanding credit scores. If your credit isn't where you want it to be, work at increasing your score over the next few months and then obtaining the loan, if possible. You can raise your score by removing old inquiries from your credit report, keeping your credit card balances at 30 percent or less than the total limit, and by paying all of your bills on time.

Other benefits to the borrower include fixed interest rates, meaning the rate will never increase throughout the life of the loan, no prepayment penalties if you pay off the loan early, an easy and fast application and approval process, and more.

For the investor, there are many benefits to peer to peer lending, as well. Typically, investors will get access to thousands of loans and can choose which ones they want to invest in. With Prosper, for example, investors can invest as little as $25 into the loan of their choice. For investors, the returns are high and the process is simple, making it an excellent choice for many.

When choosing a peer to peer lender, make sure to read all of the terms and conditions so you know exactly what you're signing up for. Most lenders will disclose all fees and late payment penalties, but it's always in your best interest to double (or even triple) check the terms of the loan.

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