Tuesday, September 29, 2015

Should You Try a Peer-to-Peer Loan?

For many people, coming up with thousands of dollars takes more than dipping into their savings account. One option is taking out a peer-to-peer loan. What are these loans all about?

Here’s what you need to know about this rapidly growing alternative mode of lending that removes the bank as the middleman.

What is peer-to-peer lending?

Also known as P2P lending, peer-to-peer lending is the large-scale lending of money between people - online.

Thousands of borrowers and lenders work together in a relationship that is secured by a lending company such as industry leader Lending Club and its main competitor, Prosper.

While peer-to-peer marketplaces are still relatively new, they are regulated by the Securities and Exchange Commission, and are required to register in individual states, too. Lending activities must comply with federal and state consumer lending laws.

How does peer-to-peer lending work?

Unlike traditional lending in which borrowers apply for money from the bank itself, P2P lending connects borrowers with investors - those who have agreed to lend out their money (incentivized by an attractive return) - directly.

The person doing the lending checks out the borrower's credit history and decides whether or not they're going to lend him/her money.

How much can you borrow?

Loan amounts vary by P2P lending site. Lending Club offers loans between $1,000 and $35,000. Prosper offers loans between $2,000 and $35,000.

Pros of P2P lending

Many borrowers like P2P lending for its low loan rates, which means low monthly payments and a low total cost of borrowing.

Interest rates at Lending Club and Prosper range from about six percent to 30 percent. The average loan is about $13,000, and the average FICO score of a borrower at both lenders is about 700, according to Consumer Reports.

Other benefits include:

  • A simple application process
  • Loan approval is relatively easy compared to a traditional bank
  • You can qualify for smaller loans than most traditional banks are willing to make
  • Loans are term-based with monthly payments
  • You can receive your funds in a matter of days

Cons of P2P lending

Prosper and Lending Club both charge fees for new loans: one to five percent of the total loan amount.

They also charge fees for late payments, which are assessed if your payment is more than 15 days late.

And if you're a credit risk, you'll be rejected. You must have a solid credit history, with a minimum credit score in the mid-600s.

Finally, you must live in a state that allows this type of borrowing.

To learn more about P2P lending, go to LendAcademy.com.

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Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.



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