Peer-to-peer lending was first introduced in 2005 when Zopa introduced its online lending service. However, it wasn’t able to get off the ground until the financial crisis of 2008.
To deal with this financial crisis, the banks cut their lending capabilities, and central banks cut rates for savings. This meant that consumers needed a better method of borrowing, and investors were searching for alternatives to lending.
Since its introduction to the invention of peer-to-peer lending, it has been a major hit in the world and with justifiable reason. This type of loan could provide a variety of advantages for investors and borrowers compared to traditional banks.
What is peer-to-peer lending, and could it be beneficial to you?
This article will help you discover the basics of P2P, how it operates, and its advantages and disadvantages. We’ll also tell you about five applications that will be available in 2021.
Let’s get started.
What is Peer-to-Peer Lending?
Peer-to-peer lending, also referred to as P2P lending, allows the individual borrower to get loans directly from individuals who invest. It’s a viable alternative to conventional sources for loans and credit, like credit unions and banks.
How Does Peer-to-Peer Lending work?
Peer-to-peer lending platforms link individual clients with investors. They earn revenue through fees they charge investors and borrowers. The most popular sites are LendingClub, Prosper, and Funding Circle.
Let’s take an in-depth look at the procedure for investing in P2P lending and how to obtain a peer-to-peer loan.
How to Invest in Peer-to-Peer Lending
- For you to begin, it is necessary to establish an account on a peer-to-peer lending application.
- After that, you’ll be able to investigate different loans. The more advanced P2P lending platforms typically classify loans to evaluate the risk. Some offer automated investing tools.
- The next step is to pick an investment and then allocate the funds. You could finance the entire loan and diversify your investment portfolio through financing just a portion of different loans.
- Then, you can sign into the peer-to-peer lending app to track your investment and earnings performance. You can then either reinvest any earnings or take them out.
How to Get a Peer-to-Peer Loan
- After you’ve determined the kind of peer-to-peer lending you’re looking for, you’ll need to select a P2P loan site.
- The next step is to make an application through the website – this is often the result of an informal credit check.
- If your request is accepted, you’ll have to examine the loan terms and the interest rate.
- If you’re satisfied with the terms of your loan, you can upload your loan application to the platform and then wait for investors to approve it. This is generally the time when a hard credit test occurs.
- Your money will be deposited in your bank account when your peer-to-peer loan is approved. Then, you’ll be required to adhere to the repayment plan you’ve agreed to.
3 Types of Peer-to-Peer Loans
It is possible to obtain a peer-to-peer loan to fund practically everything. There are three primary types of peer-to-peer loans. They all have some financial risks, which we’ll discuss in the next section. Let’s look.
1. Personal Peer-to-Peer Loans
This kind of loan can be used to pay medical bills, vehicle purchases, consolidate debts, home improvement holidays, and other big purchases. The range of loans offered by peer-to-peer lenders is often more extensive than traditional institutions.
2. Education Peer-to-Peer Loans
Many people take advantage of peer-to-peer loans to pay for their education. They are usually lump sums that allow the borrower to cover expenses for study in whatever manner they like.
3. Business Peer-to-Peer Loans
Smaller businesses typically receive peer-to-peer loans to start or grow the business. These loans are utilized to create new products, fund advertising campaigns, or expand the company by hiring new employees.
In contrast to banks, peer-to-peer lending applications let businesses submit loan applications to multiple investors simultaneously, increasing the likelihood that the loan will be approved.
5 Peer-to-Peer Lending Apps in 2021
If you’re looking to invest in peer-to-peer lending or obtain a peer-to-peer source loan, you must choose an appropriate platform. To help you start your search for peer-to-peer lending, five peer-to lending applications are available on the market.
The Upstart peer-to-peer lending application was launched in 2012. One reason that makes Upstart so popular is its unique method of evaluating potential borrowers. The company’s slogan is “You are more than your credit score.” Upstart will also consider the borrower’s academic standing, work history, and even the potential for earnings.
Prosper has been in operation since the year 2005. Since it was founded, Prosper claims that more than a million users have utilized the platform to get a loan, and people have put in around $17.7 billion via Prosper’s platform. Prosper offers a variety of loans, ranging from medical bills to debt consolidation.
SoFi stands for “Social Finance.” This peer-to-peer lending app offers many kinds of loans. However, it is particularly adept at financing student loans. When requesting loans, SoFi considers each borrower’s education and potential income. Investors can use SoFi’s application to manage all of their investments from one location, including ETFs, stocks, exchange-traded funds (ETFs), and crypto.
4. Funding Circle
Funding Circle has been around since 2005 and is primarily focused on small-business loans. The peer-to-peer lending platform has an online application process that takes just six minutes, and the borrowers may get a decision in 24 hours and receive funding in three days. More than 10 billion dollars have been lent on the platform.
5. Lending Club
Lending Club was founded in 2007 and has since seen the company has more than 50 billion dollars have been traded on the platform. The peer-to-peer lending application helps to facilitate business and personal loans. Additionally, borrowers can get loans as low as $1000 through the app. Investors can also begin with just $1000.
The Advantages and Disadvantages of Peer-to-Peer Lending
There are numerous aspects before investing in peer-to-peer lending or taking out a peer-to-peer loan.
Here’s a breakdown of the benefits and drawbacks of peer-to-peer lending for both lenders and investors.
The Advantages of Peer-to-Peer Lending for Investors
There’s Potential for a Relatively High Return on Investment
Peer-to-peer lending can yield better returns than most savings or traditional investing accounts.
For instance, Prosper’s peer-to-peer lending platform says it has delivered an average return between 3.5 percent to 7.5 percent.
Peer-to-Peer Lending Makes it Easy to Diversify Your Portfolio.
Peer-to-peer lending apps enable you to spread your capital over many investments to lower the risk.
For instance, instead of making a single loan of $10,000, splitting the funds and investing $100 in 100 loans is possible. You will lose the $100 amount if the borrower is in default. Some sites permit users to put just $25 or $50 in individual loans.
The Disadvantages of Peer-to-Peer Lending for Investors
Peer-to-Peer Investing Can Be Time-Consuming
While investing in multiple loans from peer-to-peer could help reduce risk, it could take a lot of time to conduct research and manage numerous small investments.
Additionally, there are automated investing options on specific peer-to-peer lending sites. These services usually cost fees or take a number of your earnings.
Investing in Peer-to-Peer Lending Carries Risk
Like any investment, there’s always a risk. While you can use scores and reports on credit to assess the risk, there’s not a guarantee that any borrower will be able to repay their loan.
In essence, investing in peer-to-peer lending takes the same risks banks take when they fund loans. The loans are not always paid back, and investors could lose their funds.
The Advantages of Peer-to-Peer Lending for Borrowers
Competitive Interest Rates and Fixed Monthly Payments
One of the most significant benefits of peer-to-peer loans to borrowers is the interest rates.
If you’re in the correct category, peer-to-peer loans typically have lower interest rates than credit unions and banks. Peer-to-peer loans are a great way to save money, especially when combined with debt consolidation loans.
Additionally, borrowers typically make fixed monthly payments debited directly from bank accounts. This assures them of security and stability that most credit cards do not offer.
Peer-to-Peer Loans Can Be Very Accessible
Many peer-to-peer lending apps aren’t as strict as credit unions and banks. They evaluate the applicants based according to on different criteria.
For instance, the Upstart peer-to-peer loan platform considers your educational background and income level.
In turn, those who have difficulty obtaining the loans they need from banks might be able to apply for a peer-to-peer loan.
The Process Can Be Quick and Simple
With the simplified process provided by peer-to-peer lending applications, obtaining loans can be faster and simpler than traditional methods. It’s usually just an hour to find out whether you’re eligible, and it can take only 2-3 days to obtain an advance.
While investors can see the details of your loan request, Your details will not be revealed in many peer-to-peer lending applications.
Many Peer-to-Peer Lending Apps Use Soft Credit Score Inquiries
Another benefit of peer-to-peer borrowing is that most platforms employ soft inquiries to examine your credit report during pre-approval screenings. It’s the same method used when you review your score. Soft inquiries do not affect your credit score.
You will usually know the amount of the loan and interest rates you are eligible for without impacting your score on credit. When you accept a peer-to-peer loan, the platform will usually perform a formal inquiry before the loan is officially granted.
However, many traditional lenders conduct hard inquiries when you request a loan. This lowers your score slightly but remains visible on credit reports for two years.
You’re Free to Shop Around for the Best Deal
The speed of peer-to-peer loans and their ease make it easy to find the best price.
Additionally, Soft credit inquiries allow you to compare loans from peer-to-peer lending apps without damaging your credit score, which is usually not the case using a traditional loan.
You could also use loan comparison tools, like Experian’s Loan Referral tool.
The Disadvantages of Peer-to-Peer Lending for Borrowers
If You Miss Payments, Your Account May Be Sent to Collections Faster
Similar to traditional sources of borrowing, peer-to-peer lending applications transmit payment information in credit reports. Therefore, paying on time will assist in improving your credit score. However, the late or missed payment can reduce your score.
A few websites claim that peer-to-peer lenders may be more efficient in making payments due to third-party collection agencies rather than traditional lenders. This means that the consequences of late payment can be an impact that is much greater on your capacity to borrow cash at a later date.
Ease of Securing Loans Could Lead to Financial Difficulties
Since peer-to-peer loans are easy to access, it may be tempting to get more than you require. In addition, if you are eligible for a larger loan than you have requested, some peer-to-peer platforms can encourage you to take out the entire amount.
Peer-to-peer lending is a digital alternative to conventional sources for lending and investing. It’s supported through platforms that permit users to get loans from various investors.