There are fewer peer-to-peer lenders offering consumer loans than in the past, but they can still be useful options for eligible borrowers. If you’ve had trouble getting personal loans or business loans because of your credit, you may have a better chance of getting a loan by working with a peer-to-peer lender.
Prosper is our pick as the best overall P2P lender due to its available loan amounts and relatively low credit requirements. However, if you want a larger loan or need more time to repay the loan, you will need to find another lender or another avenue of funding, such as crowdfunding.
And, if you have good credit and a stable income, you may qualify for lower rates if you get an unsecured personal loan from a bank, credit union, or online lender. Get quotes and compare rates from our selections of best personal lenders.
Guide to choosing the best peer-to-peer lending websites
Why should you use a peer-to-peer loan?
Peer-to-peer lenders are best for borrowers who may struggle to qualify for loans from banks and traditional lenders. P2P lenders have looser requirements for borrowers, making it more likely you’ll qualify for a loan.
They may also be suitable for borrowers who need to borrow money and who do not qualify for other types of financing. For example, entrepreneurs starting small businesses are unlikely to qualify for traditional business loans, so P2P loans may be an attractive alternative.
When deciding which type of loan is right for you, keep in mind that peer-to-peer loans may have higher than average interest rates and additional fees, such as assembly costswhich can increase your overall cost.
Comparison of peer-to-peer lenders
When comparing loan offers from peer-to-peer lenders or any personal lender, you should consider a number of factors:
- APR: The APR is the total cost you pay to borrow money, including interest rates and fees. The higher the rate, the more you will pay. The average APR for a loan with a 24-month term was 9.41% in February 2022, but your rate is determined by your credit score, income, debt history, and selected loan term.
- Loan conditions : The term of the loan is the time you have to repay the loan. Most personal loans have terms of five years or less. A shorter term will give you a higher monthly payment, but you’ll also likely get a lower interest rate and lower overall repayment cost.
- Creation costs: Origination fees are charged by some lenders, but not all. The fee is a percentage of your loan amount; for example, a $1,000 loan with an 8% origination fee would add $80 to the cost of your loan (or it could be deducted from your loan proceeds).
- Prepayment penalties: Some lenders impose prepayment penalties if you repay your loan earlier than stipulated in the loan agreement. When comparing lenders, make sure there are no prepayment penalties to avoid these costs.
- Minimum credit score: The minimum credit score is the score you need to qualify for a loan from a particular lender. In general, P2P lenders look for scores ranging from fair to excellent, i.e. a score of 580 or higher.
- Collateral: If you have less than perfect credit, some personal lenders offer secured loans. You use property, such as a car, as collateral for the loan. Using collateral increases your chances of qualifying for a loan and getting a better interest rate.
- Loan disbursement: While some lenders will disburse your loan the next business day after your application is approved, other lenders may take several days (or longer). If you need money fast, be sure to choose a lender that offers fast loan disbursement.
How to apply for a loan between individuals
Most P2P lenders offer pre-qualification tools that allow you to check your loan eligibility and view sample repayment rates and terms without affecting your credit score. If you decide to proceed with the loan application, you can usually complete it online.
To apply for a personal loan you will need to provide your personal information, including:
- Your name
- Social Security number
- Employer Information
The lender will review your application and carry out a credit investigation. If approved, the P2P lender will assign you a risk category and submit your information to their investor platform. Its investors can review this information and make an offer to fund the loan.
Since lenders typically work with institutional investors, such as banks and credit unions, this process is relatively quick and your loan can be funded and disbursed within days.
How can I invest and earn money with P2P loans?
While P2P lending was once an attractive way to earn a higher rate of return than putting money into a savings account, there are now fewer options for individual investors.
Few P2P companies allow individual investors to invest and fund loans; Prosper is one of the few that allows individual investors to fund consumer loans. With Prosper, you can start with a minimum investment of just $25.
Other options include:
- Kiva: Kiva is a P2P lender providing loans to people around the world who may have difficulty obtaining financing elsewhere. You can invest as little as $25 to help people start small businesses and support their families.
- Fundraising: Fundrise is a way to invest in a diversified portfolio of commercial and residential real estate, and you can start with just $10.
- Peer Street: Like Fundrise, PeerStreet is a real estate-focused P2P lender. Individual investors can contribute to real estate offers, bridging loans and home loans. However, it has a higher minimum to start investing at $1,000.
Frequently Asked Questions
What is the difference between P2P and crowdfunding?
P2P lending and crowdfunding are two ways to get a lump sum of money from many people. But how these financing options work is quite different.
A P2P loan is usually credit-based and must be repaid with interest over a set loan term.
In contrast, crowdfunding funds do not have to be repaid, and since people decide to donate to the fund based on the service it provides or the cause it supports, crowdfunding does not involve no credit check.
Why do some lenders no longer offer P2P loans?
Previously, the peer-to-peer lending industry was poorly regulated. As an innovative idea, P2P lending was largely exempt from regulations and consumer protection laws that applied to personal loans issued by banks and credit unions.
However, that has changed. The U.S. Securities and Exchange Commission (SEC) has classified P2P loans as securities, and therefore they must be registered with the FEC to comply with federal securities laws.
This placed a significant burden on lenders in terms of reporting and registration. For many it became too difficult to implement and many P2P lenders closed.
Of the P2P lenders that have continued to operate, most have stopped working with individual investors and instead only use institutional investors. This is partly because of increased regulation, and also because it is more difficult for a P2P model using individual investors to reach high loan volumes.
Are P2P loans a better choice than payday loans?
P2P lenders generally have lower credit requirements than traditional lenders, so you may qualify for a loan even if you have less than perfect credit. Although P2P loans may have higher interest rates than advertised by some personal lenders, they are still significantly cheaper than payday loans.
With P2P consumer loans, interest rates can reach 35.99% and more. However, they are much lower than payday loan APRs. According to the Consumer Financial Protection Bureau, the typical two-week payday loan has a fee that equates to an APR of almost 400%.
If you need money urgently, an organization called the International Jewish Free Loan Association might be a better place to turn than payday loans. It provides 0% APR loans for various purposes to those in need, but it is only available to residents of certain states, and some branches require Jewish religious affiliation.
Are P2P loans safe?
For borrowers, P2P loans are quite safe. Platforms that offer P2P loans act as intermediaries between investors and borrowers.
Peer-to-peer loans are not government insured or protected. However, this places most of the risk on investors rather than borrowers.
Do P2P loans affect your credit score?
Whether a peer-to-peer loan affects your credit score depends on the lender. Most P2P lenders have minimum credit score requirements and perform difficult credit applicationsand each request can cause your score to drop.
An exception is encrypted P2P lending. These loans are secured by collateral and can be issued without a credit check, so there is no credit check that can affect your credit.
With all P2P loans, your timely payments can also affect your credit. If you fall behind on your payments and your debt is sent for collection, these actions will show up on your credit reports and cause your score to drop.
How we choose the best peer-to-peer lenders
Our team evaluated 38 lenders and collected 1,520 data points before narrowing down our top picks. We weighted more than 20 criteria and gave a higher weight to those having a more significant impact on potential borrowers.
Top picks were selected based on factors such as membership requirements (15% weighted), average fixed APR (15% weighted), and average origination fee (10% weighted).
We also considered flexible repayment terms, useful features such as pre-qualification, and whether co-signer or joint applications are allowed to ensure borrowers have the best possible experience. For more information on our selection criteria and process, our complete methodology is available.
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