How to Borrow Money from Peer-to-Peer Lending Networks
Peer-to-peer lending networks, also known as P2P or social lending, allow everyday people to borrow money without going through banks or using payday advance loans. Online peer-to-peer lending platforms, such as Lending Club, Prosper, and several others, let borrowers connect with potential lenders from all over the country.
Peer-to-peer lending and borrowing networks allow people to take out short-term personal loans (usually 3 years max) for moderate sums of money (usually $25,000 max). This money can be used to finance education, buy a home or vehicle, start a small business, or pay off high-interest credit card debt quickly. One advantage of P2P platforms is that borrowers with good credit can often get better rates that what banks offer. Another plus is that borrowers with poor credit are less likely to have their loan applications denied.
Who will lend me money?The most frequently asked question by potential borrowers is "Why would a stranger lend me money?" The answer is simple: interest. Peer-to-peer loans are a money-making opportunity for people who have funds to lend. The interest fees give lenders a nice return on their investment. This is exactly how banks make money off of mortgages, auto loans, business loans, and other loans. P2P lending networks have favorable interest rates that attract everyday investors and borrowers from all over country. The secure online platform keeps all parties' information private, so borrowers and lenders do not have to interact personally.
How do I get started?Register for a free account with a peer-to-peer lending website. Lending Club and Prosper are two of the most well-known and established P2P networks, and both attract a wide range of lenders. Bear in mind that P2P networks have registration terms that may vary by state, so read the fine print carefully. Do not falsify your residence information to get around your state's requirements.
In order to set up an account and submit a loan application, you must submit to a credit check and report your income, just as you would do when applying for a bank loan. The good news is that even if you have bad credit and have been turned down by banks, you may yet qualify for a P2P loan. Each platform has its own requirements for accepting or rejecting borrowers, so if you are declined at one network, you can apply with another.
Do lenders bid for my loan?Prosper used offer an auction system where lenders could bid on a borrower's loan; the lender who offered the lowest interest rate won the loan. Prosper has discontinued this system in favor of pre-set interest rates, as Lending Club currently uses.
The auction system had advantages for borrowers, but several disadvantages too. The most obvious perk: when lenders could compete for borrowers with good credit, those borrowers could secure extremely low interest rates.
One disadvantage of a bidding system is that some borrowers set their maximum desired interest rates too low, thus turning away many potential lenders. When this occurs, borrowers cannot get the money they need very quickly.
Another disadvantage is that most lenders do not want to compete for loans by offering lower and lower rates, since lower interest rates mean that lenders get less of a return on their investments. However, when the rates are pre-set based on credit scores, this attracts more investors, thus increasing the funding opportunities for all borrowers.
What are the risks of P2P borrowing?As with any loan, if you are late on your payments, the peer-to-peer network will charge you late fees. Should you default on a loan, the P2P network will send a notice to credit reporting bureaus, which can lower your credit score. Always make your loan payments on time to avoid incurring more debt.
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