The best peer-to-peer (which can be shortened to P2P) lending sites - or peer-to-peer lending sites in general - are unique because they offers great benefits for both the borrower and those investing in the loan.
This non-traditional form of lending, which only takes a few hours for approval, is simple to do and can yield great results. The top two providers in 2013 facilitated the lending of $2.4 billion.
To begin, you'll want to find a reputable peer-to-peer lender. Next, you can fill out the simple credit application on the website. From there, the service will compile your information based on your credit score, employment and other factors to determine if you are a good investment; if you are, it will offer you financing.
Unlike traditional lenders where you have a bank or credit union investing in the loan, peer-to-peer lending gives anyone the opportunity to invest in your loan. This means when you borrow, it could be a group made up of individuals and businesses investing in you. Then, similar to a regular loan, you have payments deducted from your bank account until you repay it.
What is Peer to Peer Lending?
According to PricewaterhouseCoopers, the largest professional services firm in the world, the peer-to-peer lending market could reach $150 billion or higher by 2025.
But what exactly is peer-to-peer lending? What do the services entail?
Besides being a growing phenomenon, peer-to-peer lending, otherwise known as crowdlending, is more of a matchmaking service utilizing an online platform. Because these services operate exclusively online, the overhead is lower and the service is generally provided at a much cheaper rate compared to traditional lenders.
Additionally, peer-to-peer lending services don't lend their own funds but instead match the borrowers to the investors with the help of an internet platform. The investors themselves purchase notes - or securities backed by notes - issued by the peer-to-peer services. Investors can either be institutional, i.e. banks or hedge funds, or individual, i.e. those who lend their own funds through the platform. As of 2014, roughly 80% of peer-to-peer lenders are in the form of institutional investors.
So how exactly do the peer-to-peer companies generate revenue? Good question! These services earn revenue from charging borrowers origination fees. Not only that, but the companies charge a portion of interest to investors as servicing fees. Other charges, such as late fees, may also be included.
That being said, investors benefit financially, as they earn revenue from the remainder of the interest that the borrowers pay on the loan.
And, of course, borrowers benefit as well, thanks to a streamlined application process and the ability to access loans 24 hours a day, seven days a week. To summarize, peer-to-peer lending is all about efficiency.
Best Peer to Peer Lending: What to Consider
This method delivers excellent benefits if you need to borrow money. Here are just some of the many benefits you'll receive with this type of financing:
- A simple application process that might take you only minutes to finish.
- If you qualify, you could receive a competitive interest rate, making it a good alternative to high interest loans and credit cards.
- You will also have flexible repayment terms that make the loan more manageable for your finances.
Best Peer to Peer Lending Rates
|Company||Interest Rates||Loan Amounts||Min Credit Score|
The Best Peer to Peer Lending Sites
- Customer service available seven days a week
- Simple application process
- Weighs income and employment more than credit histories
- Excellent customer service evidenced by A+ rating with BBB
- Residency requirements means limited options for residents of TN or OH
SoFi, which is also known as Social Finance, is an online lender that offers a variety loans. Just last year, the company reached a milestone of $3 billion in funded loans over the course of three years. Borrowers can expect an annual rate between 5.5% and 9.0% depending on their creditworthiness, loan type and term. SoFi requires that its investors be accredited in order to participate as a lender and invest a minimum of $10,000. The company also accepts foreign investors. For borrowers, loans ranging from $10,000 to $65,000 are available.
SoFi requires that its borrowers be a graduate of a Title IV accredited university or graduate program. In addition, borrowers must be or have an offer of employment in order to be eligible for a loan. With just 13,500 borrowers, SoFi's lends to fewer borrowers than most of its competitors. While those numbers could suggest that SoFi is a less established lender, the company provides excellent service.
SoFi's unemployment protection is the best example of this. If you were to lose your job while paying off your loan, SoFi will put your payments on hold until you find a new job. SoFi even helps borrowers find a new job with its reemployment assistance program for its newly unemployed members.
Lending Club Review
- Quick and easy approval process
- Few extra fees
- Affordable rates for good credit
- soft credit checks
- Steep origination fee
Lending Club is a peer-to-peer lending platform that connects borrowers to a network of investors for a variety of loan types. One of the most popular uses for a loan through lending club is debt consolidation. Since its founding in 2007, it has helped finance $13 billion in peer-to-peer loans. The company boasts a quick and easy application process as well as affordable rates for good credit scores. As the icing on the cake, it only performs a soft credit pull during the initial application process.
Unfortunately, the steep origination fee can be a bit of a deterrent. While the safest borrowers with the strongest of credits would pay the lowest origination fees (1.11% is the lowest, limited to a 36-month term), most would end up paying a 5% fee.
- Receive approval in as little as 2 minutes
- Unique underwriting process that takes into account field of study and job history
- Excellent customer service that’s available to you seven days a week
- Flexible repayment options that include free automa
- High loan origination fees
Launched in 2014, Upstart has already originated more than $220 million in loans. While most lenders lean heavily on FICO credit scores, Upstart evaluates earning potential in determining the likelihood that a borrower will be able to repay their debt.
Upstart developed an algorithm which factors in school, academic performance, standardized test scores and major in order to get a grasp on ability to repay. While the majority of Upstart's borrowers are recent graduates, about 30 percent of its borrowers are over the age of 30. Upstart's algorithm has also determined that young borrowers, even those with mediocre credit, are typically more likely to repay than older borrowers, which is good news for recent grads in need of funds.
Upstart offers loans ranging from $3,000 to $25,000. Borrowers can expect an annual percentage rate between 6.5% and 24.6%. Again, investors must be accredited, but Upstart requires only $100 to begin the service.
- Flexible loan options for a wide variety of purposes
- Low fixed interest rates for qualified borrowers
- As low as 640 FICO accepted
- High loan origination fees
Founded in 2006, Prosper is the largest peer-to-peer lending service with about 1.25 million members and $350 million in funded loans. Prosper offers loans for a variety of purposes including debt consolidation, home improvement, business, auto and much more. Loans funded through Prosper range from $2,000 to $25,000. Interest rates range from 6.59% for those with excellent credit to 35.94% APR.
Prosper's application process is also fairly simple. Prosper creates a profile for each borrower based on their credit history, income, expenses and payment history. A credit score of 640 is required for new borrowers, however, a 600 score is allowed for existing borrowers. A true bonus for borrowers is that there is no prepayment penalty if the loan is paid off before the agreed upon term.
Investors are allowed to select whom they invest in with Prosper. However, Prosper does have a quick invest system which allows lenders to set certain criteria and allow the site to select the best loans based on that criteria.
Similar to the Lending Club, Prosper's origination fee is quite steep, but only if your Prosper Rating is less than desirable. Fees range from 0.50% of the loan amount to a whopping 4.95%.
Circleback Lending Review
- 15-day grace period for loan repayment monthly
- Flexible loan rates and amounts for a wide variety of purposes
- Loan terms of three to five years mean higher monthly payments
- High origination fees
CircleBack is another good option for borrowers that offers loans for a variety of options. CircleBack offers loans that range from $3,100 to $35,000. CircleBack's repayment length is fairly typical and ranges from three to five years. However, CircleBack requires a minimum credit score of 660, which is a bit higher than its competitors. Interest rates range from 6.63% to 36% APR.
While CircleBack does not offer smaller loans or flexible repayment term lengths, there are no prepayment penalties. Once a borrower's credit history has been pulled, the borrower must then accept the amount, interest and length of their respective loan. Once accepted, investors are allowed to review and fund the loan. Once the loan is funded, the funds are deposited directly into the borrower's bank account.
The origination fees, like those found on Lending Club and Prosper, are considerably steep. The fees range from 1% to 5% of the loan amount, depending on the borrower's standing.
Peer to Peer Investing
Borrowing is only a part of the equation though. If you are looking to invest, peer-to-peer lending is a great option to consider for the following reasons:
- With this option, you receive a monthly cash flow. This can help you recoup your initial investment quicker.
- You can also receive great returns when you invest in a borrower. The rates will vary depending on loan terms for the borrower but in any regard, it does still yield a healthy rate of return.
- Many services also allow you to rollover your earnings into your retirement accounts.
Before borrowing or investing, it's important to examine the services offered online. For borrowers, you'll want to pay attention to the website's reputation by researching said site on the Better Business Bureau. This can help you identify and evaluate possible issues other customers may have experienced with the service.
You'll want to analyze fees alongside the service's reputation. Some services will charge you to setup an account to invest in borrowers. In addition, keep a close eye on the range of interest rates offered to borrowers. The higher the interest rate, the more expensive the loan will be, which can create a riskier situation for both the borrower and those investing in them.
How I Determined the Best Peer to Peer Lending Site
Seeking out the best peer-to-peer lending site isn't the easiest task, but I have managed to compile a list and narrow down the selection by performing the following:
First, I searched via Google for top-notch peer-to-peer lending sites. I collected services that not only offered decent benefits, but are also well-reviewed by consumers.
Following the initial selection process, I then weeded out the weaker options. Some of these options simply didn't fit the values of MoneySavingPro.
From there, I rated the services based on the following aspects:
- BBB accreditation
- Eligibility and requirements
- The ease of the loan process
- Fees and penalties
- Reliability of customer support
Finally, I compiled the data and determined which services deserved to be on my list.
Advice for Finding the Best Peer to Peer Lending Site
While peer-to-peer lending is an appealing option for many, especially those paying off student loans, mortgages or consolidate debt, there are a few things to keep in mind.
1. While most peer-to-peer lenders do not require high credit scores, you do need a decent credit history. Most lenders require a minimum score of 640, however, as mentioned earlier, Peerform does accept scores as low as 600. Peerform is an exception to the rule, as it analyzes a variety of other factors using its loan analyzer algorithm.
2. If your credit is less than stellar, it's best to raise your credit score before submitting an application. This can be accomplished by paying off any existing debts and delinquencies and checking your credit report to ensure that there are no discrepancies you are unaware of. Keeping your credit card balances on the low end, preferably less than 30% of the credit limit, will also help your score a great deal.
3. If you're truly in desperate need of funds, submitting an application with mediocre credit could still net you an approval. It certainly is preferable to applying for payday loans, which have interest rates that sometimes exceed 500 percent, especially because your credit score is often not the only factor in determining approval.
Lenders like Upstart consider your degree, concentration and earning potential when coming to a determination. So it is possible that someone with a "meh" credit score but solid career prospects would be approved for a loan.
4. If you are approved for a loan, there are many benefits to reap. Speedy service is among the primary benefits of peer-to-peer borrowing. The fact that these lenders operate entirely electronically is what makes the process fast. Whereas traditional banks typically require some paperwork and mail you a check, peer-to-peer borrowers and investors complete the entire process online and the funds are deposited directly to your bank account once available.
Relatively low interest rates are another benefit of peer-to-peer lending. While, depending on your credit, the rates may sometimes be higher than the rate you would receive from a bank, you can get a good rate without putting something up as collateral. Banks typically request that borrowers put anything up from their home, car, fine jewelry and more as collateral in order to receive a low interest rate. With peer-to-peer lending, collateral is never requested.
And as mentioned above, a number of peer-to-peer lenders do not charge prepayment penalties if a borrower decides to pay his or her balance ahead of schedule. CircleBack and Prosper are two examples of lenders who don't charge prepayment penalties.
However, one of the greatest benefits of peer-to-peer lending is that many of them offer unemployment protection. SoFi, as mentioned earlier, provides such unemployment protection by postponing your payments until you find new employment. SoFi will even help you find a new job too. For anyone with uncertainty in the workplace and in need of financial help will want to consider a lender like SoFi.
Even the Best Peer to Peer Lending Sites Have Their Disadvantages
At the end of the day, peer-to-peer lending may not be for everyone.
Peer-to-peer lending could be considered the best financial lending source since sliced bread, but at the same time, there are disadvantages to consider.
Here are just some of the disadvantages brought about by peer-to-peer lending:
For borrowers, this alternative method of lending can ultimately backfire if the borrower is having a bit of a spending problem. You can never borrow your way out of debt. Sure, peer-to-peer loans may help with debt consolidation, but if you spend more than what you earn, then there is no way that the loan will help you climb out of the hole you have dug.Furthermore, there are serious consequences waiting for you if you don't keep track of your peer-to-peer loans. An unsecured loan can hit your credit score just as hard as any other type of loan. Peer-to-peer investors also will not loan to you if you missed a payment.
Also, like any lender, high-interest rates can be incurred if you have a less-than-stellar credit score. Fortunately, if you do not mind the high-interest rates, peer-to-peer lending for bad credit exists.
Finally, higher monthly payments are more commonplace with peer-to-peer loans in comparison to their traditional brethren. A good chunk of peer-to-peer loans that are issued are for the purpose of debt consolidation.
People who are used to making minimum payments on credit cards might end up paying double or triple the amount of the minimum payments in order to pay off the loan quickly. People may not expect this and could end up unprepared to pay off the debt, which could result in the loan going into delinquency or default. It takes a lot of discipline to make proper payments on a peer-to-peer loan compared to a traditional loan.For the lenders, peer-to-peer lending also has its risks. If you're a lender in a peer-to-peer business, you could potentially lose all of your money, especially if you invest in
If you're a lender in a peer-to-peer business, you could potentially lose all of your money, especially if you invest in high-risk loan. The high returns and double-digit interest rates may be appealing, but that could all come crashing down if you're not careful. Because of the potential high-risk, it's best to diversify your peer-to-peer lending investment portfolio by investing in quite a few loans.Lenders may also believe that it's an easy way to earn a lot of cash. This is most certainly false. You are ultimately committed to the loan you have provided for a few years.
Best Peer to Peer Lending Recap
Overall, peer-to-peer lending offers many substantial benefits. For borrowers, you might be able to obtain financing that can help you pay off old debt, invest in a new business or buy a high ticket item with an interest rate less than traditional banks offer. For investors, you can fund loans for borrowers and receive a monthly cash flow, which you can use to reinvest, pocket or rollover into a retirement account.
Peer-to-peer loans make for fantastic personal loans. If you're on the hunt for a personal loan, then be sure to check out what the best personal loans are for 2016.
It is also a good idea to check your credit score before you apply to any loan, so please be sure to take a look at the best credit report sites available.