Peer-to-peer (P2P) lending is one of the newest resources in the credit market and began around 2006 when initially Prosper and Lending Club began offering a new form a lending to the general public. The companies began with the concept that average borrowers could bypass traditional lending channels (banks) and borrow from average investors, through a new platform. Here, both borrowers and investors win because investors are now receiving a higher rate of return than other similar investments and borrowers are able to get lower rates for unsecured loans.
Growth in the market supports the concept as P2P lenders have moved to the mainstream with double digit yearly growth. They have grown fast enough to catch the attention of both big banks and regulators who monitor the lending industry. This success has led to big bank involvement through bond offerings and other investment partnerships. As this occurred, the P2P application process, risk assessment, and interest rate offerings are starting to look more like the big banks they initially struck to avoid.
Today P2P lenders pull credit and use traditional parameters when making lending decisions. They verify employment and income, and use credit score parameters similar to traditional banks.
Some important Aspects to understand when considering peer-to-peer lending options:
Credit Reports: Upon application P2P lenders make a soft pull on your credit. This means if you are turned down, it won’t affect your credit score. Upon approval a hard pull is acquired, just like traditional lenders, which remains on your credit file for two years.
Credit Scores: Most P2P lenders require a credit score in the mid six hundred range for approval. The rates offered are based on your score, debt to income, and other traditional bank parameters. A few P2P lenders like Upstart value other predictors like schooling and job classification. However, this lending platform is mostly used for funding entrepreneurs and start-ups, rather than debt consolidation.
Origination and Other Fees: P2P lenders generally charge between 1% and 5% as an origination fee. They also charge late fees and return payments fees, much like a traditional loan. Late payment grace periods are more generous than credit cards, which kick in even at one day being late.
Interest Rates: These rates vary by company and can be as high as 35% based on risk. Low risk applicants can obtain single digit rates as low as 5%. Many who apply for consolidation loans find the rates are higher than the credit cards they want to consolidate.
Loan Term: Each company has its own parameters, however, typical loan terms max out at 5 years. Some companies only offer 3 year loans, where others provide the option of a 1, 3 or 5-year term.
Payments: P2P is an installment loan with a fixed interest rate and fixed payments over the life of the loan.
Funding is generally completed within 2 weeks of the application. It is possible that you will not be funded as the loan is dependent on individual investors choosing your loan for their investment portfolio.
As with any loan you must compare your needs with the terms of the loan before deciding if this is the best option. One of the most popular reasons for obtaining a P2P loan is debt consolidation. The concept is unique in that “peers” are lending the money instead of a traditional bank and they have established a strong presence in the market. Remember, these for profit companies make money through fees and servicing of loans, making them more like traditional banks than they first appear.