Use this Peer to Peer Lending Review to get all the facts on p2p loans and personal loans
After a tough start just before the 2008 financial crisis, peer to peer lending has grown to almost $30 billion a year and could become a big part of the $16.4 trillion loan market in the United States. Use this peer to peer lending review to understand your options in the p2p loan revolution and how to get the best rates on your next loan.
Peer to peer lending sites like Lending Club and Prosper have been around since before 2008 but got a bad name as loans started to default along with the collapse of the financial system. It took five years but the peer lending industry has zoomed back and is now a huge source for debt consolidation loans and other lending.
Low rates and simplicity mean it’s only going to get bigger. Loans on the Lending Club platform have nearly doubled every year and many peer lenders are now offering business and secured loans as well.
As with any financial solution, you need to understand your options and how to get the best deal. This peer to peer lending review will help you understand how peer lending compares with other online loans and which peer loan platforms offer the lowest rates.
What is Peer to Peer Lending?
Peer to peer lending is really the same as getting a traditional bank loan, though faster and at a lower cost. Instead of walking into your local bank branch, you pull your chair up to the computer to fill out an application for a peer loan.
A peer loan application starts with the amount you want to borrow and your contact information. The site then does a ‘soft’ inquiry on your credit to confirm your application and offer a rate on your loan. Peer loans are usually from $1,000 up to $35,000 with payments made monthly on terms of between three to five years. Your payments and interest rate stay the same just like any other loan.
If you agree to the interest rate on your loan, the application is put on the peer to peer lending site where investors can fund the loan directly. This is really where the p2p phenomenon is saving money and becoming hugely popular. Instead of your bank selling its loans to investors or investment funds, with all the middlemen taking a cut of the profits, people can invest directly in peer loans. It turns investors into bankers making money off the loan interest.
The peer to peer website collects the payments on your loan each month and passes them on to the investors. Investors never see your personal information or contact details. Investing in peer loans is so hot right now that almost all loan applications are funded within a day or two and the money can be in your account in less than a week.
Peer to peer lending is really just the intersection of lending with the social media and online revolution.
How is Peer to Peer Lending different from Personal Loans?
Peer to peer lending is only slightly different from other online personal loans and many people consider them the same. Where investors fund the loans directly on a peer lending site, the website itself makes the loans on a personal loan site.
There’s really no difference for borrowers. If you were to go to Avant Credit for a personal loan, the loan application and process would be almost identical to the one on Lending Club. The only difference would be that Avant would fund your loan immediately while you might have to wait a day or two to get your peer to peer loan funded on Lending Club.
The trade-off for getting your personal loan funded immediately is usually a higher interest rate. Because peer loans work directly with the investors, rate are generally lower though not always for bad credit borrowers.
One disadvantage of peer lending is often a higher credit score requirement. You’ll need a credit score of at least 660 on Lending Club and 640 on Prosper while personal loans are available for credit as low as 580 FICO. This makes personal loans the preferred choice for bad credit loans and getting back on track after a hiccup in your finances. Check out this list of the 10 best bad credit personal loan sites and how to use a personal loan.
Peer to Peer Lending Review
Now that we have a basic understanding of what peer to peer lending is and how it works, we’ll cover a peer to peer lending review of the two most popular websites. There are a few other p2p loan sites but these two are by far the largest and offer the best deals for borrowers.
Lending Club is the largest peer to peer lending site in the world with more than $16 billion in loans funded since 2009. Loans are available up to $40,000 and available in 49 states (yep, my home state of Iowa is the only one not onboard). Most borrowers use their loan to pay off high interest credit cards and Lending Club reports that borrowers reduce their rate by 35% on average.
Lending Club charges an origination fee of between 1% and 6% on your loan and will take this amount out before your loan gets deposited in your bank account. This covers the payment processing and there are no other fees if you make your monthly payments on time. It’s free to make your monthly payments by automatic withdrawal though it will cost $7 to pay by check.
Rates as of March 2016 are among some of the lowest for peer to peer lending and online loans, starting at 5.3% for good credit borrowers. When you fill out an application, Lending Club will assign a loan grade depending on your credit score. Interest rates are based on your loan grade as well as the length and amount of the loan.
Other loans available on Lending Club include: business loans, car loans, home improvement loans and medical loans.
Most people think of peer to peer lending as only Lending Club and Prosper but there are many other websites for a p2p loan. The only difference is that anyone can invest in peer loans on Lending Club and Prosper while only accredited investors can lend on other sites. There’s no difference for borrowers.
I don’t review or recommend most of the peer lending sites. Most don’t really offer anything new and many charge really high rates. One of the best peer to peer lending sites for bad credit borrowers is Personal Loans.com, a site I’ve used twice.
The advantage of Personal Loans is that it has a network of lenders that compete for loans. This means borrowers get the lowest rate available and can choose between peer to peer loans, personal loans and even traditional loans from banks on the website.
The website offers one of the biggest ranges in loans, from $500 to $35,000 so you can borrow just as much as you need. Loans can be repaid on terms from six months to six years and rates generally range from 10% to 32% depending on your credit score. Another advantage of Personal Loans is that it will make loans to people with credit scores as low as 580, opening up peer loans to many more bad credit borrowers.
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Prosper was the first peer to peer lender but hasn’t gotten the attention or growth that Lending Club has received. The p2p loan site has originated $6 billion in loans since 2008 for everything from debt consolidation to home improvement and more.
The application process is the same on Prosper as it is on Lending Club. After you fill out your contact information and how much you want to borrow, the site will run a ‘soft’ check on your credit. This doesn’t affect your credit score so I always recommend shopping around for a peer loan or a personal loan to find your best rate.
If you agree to the interest rate and other loan terms, Prosper will run a ‘hard’ inquiry on your credit just to verify your information one last time before your loan goes live on the site. Both peer to peer lending sites comply with all loan regulations and you’ll see all the same truth-in-lending forms that you would get with a regular bank loan.
Prosper offers loans from $2,000 to $35,000 at rates that range from 5.99% to 36% depending on your credit score and the loan amount. Fees are generally lower on Prosper, ranging from an origination fee of 0.5% to 4.95% depending on your credit. Prosper may accept lower credit scores for its loans with a credit score of at least 640 FICO compared to a score of 660 needed on Lending Club.
Borrowing on Prosper is available in all states except North Dakota, Maine and Iowa. I interviewed the President of Prosper, Ron Suber, in 2014 about the future of peer to peer lending and how it’s bringing new opportunities to borrowers.
Peer to Peer Lending Review: Side by Side Comparison
A side-by-side comparison of the peer to peer lending sites shows how similar they are in rates and fees. Both sites charge a commission to process your loan and a $15 fee for late or failed payments.
Prosper has stopped showing its average rates for loans on the website. The company said that it was raising rates by an average of 1.4% earlier this year while Lending Club raised rates by 0.25% in December after the Federal Reserve raised rates for the first time in six years. Prosper has disclosed that loans carry an average rate of 14.9% across all categories.
The side-by-side comparison below shows rates on Prosper as of 10/2014 but may not be current. Rates for Lending Club are current as of 3/2016 and an average of the range reported for each loan grade.
|Peer to Peer Lending Site||Loan Fees||Credit Score Needed||Loan Rates||Notes|
|5%||580||9.95% to 36.0%||Best p2p loan site for bad credit borrowers. Lower credit score and three options including peer loans, bank loans and personal loans.|
|1% to 6%||640||5.3% to 31.0%||Low rates on p2p loans for good credit borrowers.|
|No Fee||Not available but higher than most, around 680 FICO||5.95% to 14.2%||Special discounts for variable rate loans. Offering $100 cash back on peer loans.|
|1% to 6%||620||6.25% to 30.0%||Best peer loans for graduates and no credit history.|
P2P Loans Complaints and Customer Reviews
I’m a big believer in what p2p loans mean for opening up lending to people locked out of bank loans by restrictive credit score requirements but there are some complaints. I wanted to use this section to highlight some of the common peer lending complaints and other reviews.
The biggest peer lending complaint I’ve seen is that some websites prey on bad credit borrowers with super-high interest rates. It’s part of the reason I only recommend a few peer to peer lending companies on my website, among them Lending Club and Personal Loans. Rates on peer loans are not regulated to the extent of traditional banking or payday loans yet so there are companies out there that will take advantage of borrowers.
Another peer lending complaint I hear often is the high origination fee, sometimes as high as 6% on the money you borrow. These lending fees are coming down and there are a few lenders that charge 3% or less on their loans.
Finally, a lot of borrowers are surprised when missing a payment on their peer loan hurts their credit score. There is a misconception that peer lending isn’t like other loans but it’s not the case. Missing a payment or defaulting on your p2p loan will destroy your credit just like any other type of loan.
What Borrowers Need to Know about Peer to Peer Lending
This peer to peer lending review will help you understand your options for peer loans but there are still risks with peer lending, just as with any type of debt. Peer and personal loans are unsecured, meaning you don’t have to put your home or car up as collateral but that means interest rates are generally higher. Use a peer loan to pay off higher interest rate debt on credit cards but watch the interest rate and don’t use loans for shopping and things you don’t need.
Since checking your rate on a peer to peer loan doesn’t hurt your credit score, it’s always best to check to see if you qualify on a couple of different sites to see which offers the best rate. Check out the table above or start with Lending Club, Upstart or PersonalLoans.
Peer loans don’t have early payment penalties so try to pay off your loan as soon as possible. I crunched the numbers on the benefit to paying your mortgage loan off early on my other blog and found that just paying $15 extra a month can save you more than $5,700 in interest. The saving is even higher with peer loans.
Peer lending is a tool just like any other type of debt and getting all the facts is critical to using peer loans correctly. I’ve covered the two largest sites in this peer to peer lending review but let me know if you have any questions on other p2p loan sites or personal loan options.