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Understanding How Peer to Peer Lending (P2P) Works | SoFi

Sometimes you need a loan for a business that a traditional bank might not approve. In these cases, a peer-to-peer (p2p) loan could be what you are looking for. Peer-to-peer lending, also known as social lending, grew out of the 2008 financial crisis. When banks stopped lending money as freely as in the past, potential borrowers had fewer lending options. At the same time, low interest rates meant lower yields on savings accounts or CDs.

enter p2p lending sites. P2P lenders essentially cut out the middlemen (banks and traditional lenders) and created a space for borrowers and investors to do business. Since then, the concept of peer-to-peer lending has taken off, with the rise of a number of peer-to-peer lending platforms.

Reading: Sofi peer to peer lending

Wondering if a p2p loan is right for you? Or if investing in p2p loans is a smart way to diversify your portfolio? let’s take a look at some of the pros and cons.

what is peer to peer (p2p) lending?

P2P lending connects people who want to borrow money with individual investors who want to lend money. P2P lending sites like P2P Lenders, Prosper and Upstart, three of the largest P2P lenders, provide low-cost platforms where borrowers can apply for loans and investors can bid on them.

Most personal loans offered on p2p platforms range from $1,000 to $40,000 and have repayment periods of approximately 36 months. interest rates can vary widely, from about 6% to 36%, depending on factors including the purpose of a loan and the individual’s credit history and perceived risk.

Lending platforms make money by serving as intermediaries in this process. In exchange for keeping records and transferring funds between parties, they charge a fee, usually a 1% annual fee, to the investors who lend the money. Some platforms also charge borrowers origination or closing fees, which typically range from 1% to 5% of the loan amount.

In addition to personal loans, many p2p platforms can also offer small business, medical and educational loans.

Are peer-to-peer loans safe?

Most of the risk of peer-to-peer lending rests with the investors. Borrowers may default on their loans, and that risk increases if the investor chooses to lend to those with lower credit ratings. if the loan were to default, the investor may not get the money back.

In addition, peer-to-peer lending is an investment opportunity, and returns are never guaranteed when you invest. there is a risk that investors may lose some or all of the amount they invest. Unlike deposit accounts with a traditional bank or credit union, P2P investments are not fdic insured.

how does peer to peer (p2p) lending work?

The basic p2p lending process works like this: A borrower first goes through a quick soft credit pull with the p2p lending platform of their choice to determine initial eligibility. If eligible to continue, the lender will likely conduct a strong credit pull and then assign the borrower a “loan score,” which will help lenders or investors assess how much risk it might be to lend to them.

The borrower can list their loan, including the interest rate they are willing to pay. With most p2p lending platforms, the borrower has the opportunity to present their case; they can provide an introduction and describe why they need the loan. An attractive and creative listing might have better luck attracting a lender’s attention and trust.

Lenders can then bid on the list with the amount they can lend and the interest rate they would be willing to offer. Once the listing is complete, the qualified offers are combined into a single loan and that amount is deposited into the borrower’s bank account.

examples of peer to peer (p2p) lending

With the rise of p2p lending, there are now several lending platforms to choose from. Here are some examples of popular peer to peer lending sites:

lendingclub: Lenders offer loans of up to $40,000 that can be used for a variety of purposes, including paying off high-interest debt or financing a home improvement project. Borrowers can receive funds in as little as 24 hours after loan approval.

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prosper: prosper can provide loans in amounts ranging from $2,000 to $40,000. Loan terms are three or five years, and financing can occur in as little as one business day.

upstart: upstart can offer borrowers loans of up to $50,000, with loan terms of three or five years. your rate can be verified in minutes, and most loans are funded within one business day of signing.

peer-to-peer (p2p) loans for bad credit

It is possible to get a person-to-person loan with a bad credit score (ie a FICO score below 580). however, those with lower credit scores will likely pay higher interest rates.

Also, people with bad credit may have more limited lender options, although there are peer-to-peer loans for bad credit options. Many platforms have minimum credit score requirements, which tend to be in the range of fair (580-669) to good (670-739). For example, Prosper, one of the leading p2p lending platforms, requires a minimum score of 680.

If you have bad credit and are looking for a p2p loan, you can first work on improving your credit score before applying. Or you might consider getting a cosigner, which can increase your chances of getting approved and get a better rate if you’re having a hard time getting a personal loan.

peer-to-peer (p2p) lender fees

Peer-to-peer lending platforms may charge fees to both borrowers and investors. what fees apply and the amount of these fees may vary from lender to lender.

A common fee that borrowers may encounter is an origination fee, which is usually a percentage of the loan amount. Other fees borrowers may face include late fees, returned payment fees, and fees for requesting paper copies of records.

investors, meanwhile, may owe an investor service fee. this is usually a percentage of the amount of loan payments they receive.

pros of peer to peer (p2p) lending

Peer-to-peer lending has advantages for both borrowers and investors. however, the benefits will differ for both parties involved.

pros of p2p loans for borrowers

Easier Eligibility: The biggest advantage for a borrower who takes out a peer-to-peer personal loan is being eligible for a loan that they might not have been able to get from a traditional lender.

faster approval and competitive rates: p2p lenders can approve your loan faster and offer a more competitive rate than a traditional lender would offer.

Possible to pay off credit card debt: One way people use p2p loans is to crush their credit card debt. People with high credit card balances could be paying up to 20% APR or more in interest charges. if they can eliminate it with a p2p loan at a lower interest rate, it can save them a lot of money.

Option to finance upcoming expenses: Those who face many upcoming expenses may find it more profitable to obtain a p2p loan instead of putting those expenses into a high-interest loan. card.

pros of p2p loans for investors

Promising Alternative Investment Opportunity: Some see p2p lending as a promising alternative investment. When you lend money p2p, you can earn income on the returns as the borrower pays you back. Those interest rates can be a few percentage points higher than what you could earn by keeping your money in a savings account or a CD. while there is some risk, some investors see it as less volatile than investing in the stock market.

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choice to spread risk: p2p lenders also offer many options in terms of the types of risk investors want to take. Plus, there are ways to spread the amount you’re borrowing over multiple loans with different levels of risk.

sense of community: For borrowers and investors, the sense of community on these sites is a good alternative to other forms of lending and investing. borrowers can tell their stories, and investors can help give their borrowers a happy ending to those stories.

disadvantages of peer-to-peer (p2p) lending

Although there are advantages to peer-to-peer lending, there are certainly problems as well. these include:

risk for investors: the biggest disadvantage of p2p loans is risk. Since p2p loans are unsecured, there is no guarantee that an investor will get their money back. Borrowers on a p2p site could be there because traditional banks have already rejected their application. this means that investors may need to do additional legwork to assess how much risk they can take.

Potentially higher rates for borrowers: For borrowers, while p2p lenders may approve a loan that a traditional bank would not, they could offer it at a much higher interest rate. in these cases, it might be wiser to look for alternatives instead of accepting a loan with an expensive interest rate.

Personal effort and exposure for borrowers: There can be a lot of personal effort and exposure for the borrower. Borrowers must present their case, and their financial history and risk rating will be posted for all to see. Even though we’re used to sharing much of our lives online, sharing financial information can seem like too much for some borrowers.

relatively new sector with evolving regulations: so there is a risk that p2p lending will do itself. the concept is still relatively new, and deciding how best to regulate and report on the industry is still a work in progress. some lending platforms have already had growth problems as well. as regulations around the industry change and investors are tempted to go elsewhere, the concept could lose steam, putting lending platforms at risk of closure.

peer-to-peer (p2p) lending vs. bank lending

When it comes to p2p loans versus bank loans, the biggest difference is who finances the loan. while bank loans are funded by financial institutions, peer-to-peer loans are funded by individuals or groups of individuals.

Also, bank loans tend to have more stringent qualifying requirements compared to p2p loans. This is why those with lower credit scores or poorer credit histories may turn to peer-to-peer loans after traditional lenders deny them. in turn, default rates also tend to be higher with peer-to-peer lending.

the takeaway

Peer-to-peer lending cuts out the middleman, allowing borrowers and investors to do business. For borrowers, p2p lending can offer an opportunity to secure financing that they may have difficulty accessing through traditional lenders. And for investors, p2p lending can offer an investment opportunity and a sense of community as they see where their money goes. however, there are drawbacks to consider before taking out a peer-to-peer loan, namely the risk involved for investors.

Whether you’re getting a p2p loan or a loan from a traditional lender, it’s important to shop around to find the most competitive terms available to you. sofi makes it easy to compare personal loan rates, and then you can apply online in just a minute.

frequently asked questions

Are peer-to-peer loans safe?

There are certainly risks involved in peer-to-peer lending, particularly for investors. For one thing, borrowers could default on their loan, causing investors to lose their money. In addition, there is no guarantee of return when investing.

what are peer to peer loans?

Peer-to-peer lending is a type of loan in which individual investors lend money directly to individual borrowers, effectively cutting out banks or other traditional financial institutions as intermediaries. this can allow borrowers who have been denied access to funds by more traditional lenders and give investors the opportunity to profit.

what is an example of peer to peer lending?

Some popular p2p lending sites include Lending Club, Thrive, Upstart, and Circle Funding. Borrowers can use peer-to-peer loans for a variety of purposes, such as home improvements, debt consolidation, small business costs, and major expenses like medical bills or car repairs.

financial tips & Strategies: The advice provided on this website is general in nature and does not take into account your specific goals, financial situation and needs. you should always consider their appropriateness given your own circumstances. Third Party Brand Mentions: No brands or products mentioned are affiliated with, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are the property of their respective owners. Check Your Rates: To check the rates and terms you may qualify for, sofi performs a soft credit pull that won’t affect your credit score. however, if you choose a product and proceed with your application, we will request your full credit report from one or more credit reporting agencies, which is considered a hard credit pull and may affect your credit. sofi loan products sofi loans are originated by sofi bank, n.a., nmls #696891 (member fdic), and sofi lender corp. nmls #1121636 , a lender licensed by the department of financial protection and innovation under the california financing law (license # 6054612) and by other states. For additional product-specific license and legal information, see sofi.com/legal. fair housing lender. sopl0222018

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