Peer-to-peer lending, also known as P2P lending, offers consumers and small businesses an alternative to traditional bank loans. It brings individual lenders and borrowers together in an online marketplace.
It is a relatively new way to borrow money, born from the 2008 financial crisis when many of the world’s largest banks tightened restrictions for sub-prime borrowers.
In contrast to traditional lending that depends on the rules and regulations established in the financial sector, peer to peer lending allows individuals to provide money to borrowers, cutting out much of the red-tape instituted by typical banks and financial firms.
Consumers can get loans as low as $1,000, but not more than $35,000. Small businesses can borrow $15,000 to $100,000.
Peer-to-peer lending has become a popular option for those wanting to refinance high-interest loans or consolidate credit card debt. Typically carrying a 3 to 5 year term, peer to peer loans offer fixed monthly payments. Interest rates for peer to peer loans vary widely from as low at 7% up to 15% or more. Interest rates depend on the borrower’s credit score.
Who should consider a peer to peer loan?
Peer-to-peer loans work best for those who need to borrow at least $1000. The fairly long-term nature of these loans means they aren’t suitable for small cash shortages or simple cash advances.
While your credit doesn’t have to be perfect to obtain a peer to peer loan, some lending networks require a credit score of 580 to 660 to qualify for a peer to peer loan.
Fixed monthly payment options can make peer to peer loans attractive. Many borrowers prefer to know how much they will pay each month, as opposed to the variable rates charged by credit card companies that can fluctuate wildly from one month to the next. Plus, it’s often easier to make one payment than to remember different due dates for several credit cards or high-interest loans.
Disadvantages of peer-to-peer lending
While peer-to-peer lending can be a great option for many strapped consumers, it’s not the right strategy for everyone.
Peer-to-peer-lending can be a poor choice for you if you:
Have bad credit
As mentioned above, to qualify for most peer to peer loans you’ll need a credit score of at least 580. Plus, if you’ve filed for bankruptcy you’ll have a difficult time qualifying as well. Other financial factors such as current liens or low income can also prevent you from getting a peer to peer loan.
If your credit is poor you might look into payday loans from a direct lender instead. Online payday lenders only require a checking account and proof of regular income from employment to qualify for a short-term loan.
Need fast cash
The process for applying for a peer-to-peer loan is similar to the process used to apply for a traditional bank loan. You’ll fill out an application and wait for approval. Generally the time to approval is quicker than with typical bank loans, but it still takes time. If you need cash by tomorrow, you’ll be out of luck.
Consumers who need quick cash are often better off looking for cash advance lenders instead. These lenders can often process applications the same day and have the money in your bank account in 24 hours or less.
Cash advances are perfect for emergencies such as unexpected car repairs or rent payments.
Don’t want long-term debt
Just like traditional loans, peer-to-peer loans typically carry a term of 3 to 5 years. You’ll want to think about the impact the payment will have on your finances and decide whether you’re better off with a more short-term option.
Though peer-to-peer loans offer many advantages over traditional bank loans, they are not the best choice for everyone. If you have bad credit, need a loan of less than $1000, need the money right away or don’t want to go into long-term debt, you might have better luck with a short-term payday loan instead. Be sure to research your options to ensure the best outcome for your financial future.