What is peer-to-peer lending?
P2P lending started with the idea of connecting borrowers and investors directly. After the 2008 financial recession, when many traditional banks tightened credit requirements, they became popular with borrowers, especially those with poor credit ratings. Peer-to-peer offers a better way to raise money.
Today, the original form of “retail” peer-to-peer lending — where individual consumers invest part of the loan — has morphed into institutional lending, backed by institutions such as hedge funds or insurance companies. LendingClub ended its retail investor program in 2020 and is now facilitating institutional lending. Prosper still allows consumers to invest in partial loans.
How does peer-to-peer lending work?
To get a peer-to-peer loan, a borrower operates in the same way as an online loan.
Peer-to-peer retail and institutional lending companies verify eligibility through pre-qualification, which includes mild loan deductions that don’t affect your credit score.
During prequalification, you can choose the loan amount and loan purpose, providing your name, date of birth and address. You can then see the APRs and loan terms you may be eligible for.
If you decide to apply, like other lenders, peer-to-peer lenders will confirm other factors, such as your credit score and credit history, which include rigorous credit checks.
Features of Peer-to-Peer Lending
Peer-to-peer loans are online loans that share the following characteristics:
Processing Fee: This is an upfront fee charged by the P2P lender to cover the cost of processing your loan. The fee is usually between 1% and 8% of the loan amount.
Online experience: P2P lenders allow borrowers to manage everything on the lender’s website, from applying for a loan and uploading documents to signing loan agreements and monthly payments.
Because P2P loan applications may be reviewed by multiple investors, financing can take longer than a personal loan from a bank or other online lender — up to a week in some cases.
Peer-to-Peer Lending for Small Businesses
Funding Circle and StreetShares are peer-to-peer lenders that only offer small business loans. FundingCircle caters to companies that need capital to expand, while StreetShares is more suitable for new companies looking for working capital.
Can you get peer-to-peer loans with bad credit?
Borrowers with bad credit (borrowers with a FICO score of 629 or below) can opt for P2P lending, but they can have higher interest rates. For example, a 4-year loan of $15,000 with a 28.7% APR and monthly payments of $529 would result in a total interest cost of $10,392. You can use a personal loan calculator to calculate average instalments and payments.
While lenders like LendingClub, Prosper, and Upstart have minimum credit ratings in the bad or fair credit range, you may qualify for lower rates through a credit union or through a secured or co-signed loan.
How to Qualify for Peer-to-Peer Lending
You can prequalify a P2P loan to see estimated interest rates and terms before you formally apply. The prequalification process usually involves a mild credit check that won’t affect your credit score. You can prequalify on NerdWallet and compare borrowing costs and features from multiple lenders.