Peer-to-peer (P2P) lending is a relatively new phenomenon that allows borrowers to bypass traditional financial institutions and instead take out loans through online crowdfunding.
How It Works
Borrowers apply to have their personal loans posted on an online platform. Private investors then select the loans they wish to fund and are repaid through the borrower’s monthly payments, plus interest. The average interest rate for a P2P loan is about 14%, but can go as low as 7% if you have strong credit. This can be especially alluring for people who want to consolidate credit card debt or other high interest payments because the rates are comparatively low. Most P2P lenders also charge an upfront origination fee, so be sure to factor that amount into the loan amount.
Before having your loan posted on a peer-to-peer lending platform, your application will go through a credit check before being approved. If you are approved for a loan, you will receive a grade that corresponds to your risk. The lower your grade, the higher the interest rate you can expect. The good thing about this process is that most lenders typically just do a soft pull on your credit to determine your interest rate. You can then choose whether or not to move forward with the application without having your credit score negatively impacted.
Once you accept the terms of your loan, however, you’re not automatically funded. Your loan is then listed for investors to review and commit funding. If investors don’t fund your loan in the entire amount by the designated deadline, you don’t receive any funding. You may reapply for a loan, but typically have to wait a certain amount of time, depending on the platform.
Peer-to-peer lending can be a beneficial alternative for people seeking a transparent personal loan. As with any type of loan, be sure to evaluate and compare several lenders before deciding which one to go with.