Person-to-person loans, also known as P2P loans, do not come from traditional lenders such as banks, credit unions and finance companies. Instead, you borrow money from another person or several people. You will pay interest on your loan, but it may be easier to approve one of these loans than a traditional bank loan.
What is P2P?
That said, P2P loans usually refer to an online service that handles all logistics for borrowers and lenders. In addition to providing agreements, payment processing and the assessment of borrowers, P2P loans facilitate the connection of people. Instead of borrowing only from people you know or from your community, you can access each company’s website and sign up to borrow from individuals and organizations across the country.
Why use person-to-person loans?
You may be wondering why you should try a P2P lender instead of a classic bank or credit union. P2P loans can help solve two of the biggest problems facing borrowers: cost and approval.
Cost Reduction: P2P loans are often less expensive than loans available from traditional lenders, including some online lenders. The loan application is usually free and the origination fee is usually about 5% or less for most loans. Perhaps more importantly, these loans often have lower interest rates than credit cards. The most popular lenders offer fixed interest rates, which allows you to obtain a predictable and consistent monthly payment. P2P lenders do not support the same overhead costs as larger banks with large branch networks. They transfer some of these savings to borrowers.
Easier approval: Some lenders only want to work with people who have good credit and the best debt-to-income ratios. But P2P lenders are often more willing to work with borrowers who have had problems in the past or are in the process of obtaining credit for the first time in their lives.
With good credit and high income, loans are cheaper, and this also applies to P2P lenders as well as traditional lenders. But in many communities, lenders wanting to work with low-income borrowers or people with bad credit tend to charge significantly higher rates and fees. These borrowers then have only a few options to offer them, such as payday loans, similar products.
Some P2P lenders, such as MetLoan, offer loans to people whose credit score is as low as 520. Other P2P lenders who provide loans to people whose credit score is not optimal may charge interest of up to 36%, but this remains important. Beat a payday loan.
How it works
Every P2P lender is different, but the idea is that there are many people who have money to lend and who are looking for borrowers.
These people want to earn more than they can get with a savings account and are willing to make reasonable loans. P2P sites serve as markets for connecting borrowers and lenders. Posperu has modeled itself on an “eBay for Loans”.
Qualification: To borrow, you usually need a decent credit, but not perfect. Again, different services have different requirements and lenders can also limit the risk they are willing to take. In most large P2P lenders, investors can choose from several risk categories. If your credit ratings and income are high, you will fall into low risk categories. Some lenders look at “alternative” information such as education and work history that may be useful if you have a limited credit history.
Apply: With most lenders, you just need to fill out a similar application to any other loan application. In some cases, you provide a personal narrative or inform lenders about yourself and your money plans. You might even be able to use social networks to help you get approval. Once your application is accepted, the financing can be more or less instantaneous or investors can take a few days to decide to finance your loan.
Fees: You will pay interest on all loans you obtain, and your interest charges will be reflected in your monthly payment (these fees are not usually charged separately). In addition, you will probably pay a severance fee of several percent of the amount of your loan. However, the better your risk profile, the lower the cost. Be sure to consider this cost when setting the amount of your loan, as this can reduce the amount of cash you get. Additional fees may apply for such things as late payments, returned checks and other irregular transactions.
Credit Report: The most popular online P2P lenders report your activity to credit reporting agencies. As a result, your payments on time will help you build and improve your credit, which will make borrowing on better terms easier in the future. However, if the payments fail or you default on the loan, your credit will suffer. Make these payments a priority and contact your lender if you are having a difficult time.
Lenders: There are several P2P lenders to choose from, and others open each year. Posperu and Lending Club are two of the oldest loan networks, and you can try to get personal and commercial loans from these lenders. Upstart is a growing competitor for personal loans and Funding Circle is a growing lender.
Original P2P lenders have financed your loan with others. Now space is changing and financial institutions are increasingly financing loans, directly or indirectly, instead of individuals. If it concerns you (you may not care, as long as you take out a loan from someone ), find the service you plan to use and find out where the funding comes from.
Person-to-person loans are not limited to established online sites. You can set up loans informally or use crowdfunding methods instead of going through traditional sites. To avoid problems, discuss your plans with a local lawyer and tax advisor. You may need to use a written agreement and follow certain rules to achieve the desired results. Local professionals can help you and several online services offer personalized deals.