New to peer-to-peer lending? It’s a type of lending that has been around for over 15 years in the U.S. and has continued to grow in that time. It’s a way for borrowers to access competitive rates outside the traditional bank lending model.
It also brings the potential for higher returns to individual investors, often even including those who are non-accredited. P2P lending is a platform meant to cut out the middleman and generally democratize the loan landscape.
On top of that, there are reputable lenders across industries. That means better diversification among unsecured personal loans, business loans, and even commercial real estate projects.
Let’s jump in and find out how peer-to-peer lending works and who are the best P2P lenders out there today.
Peer-to-peer (P2P) lending takes online lending to the next level, directly pairing lenders and borrowers in a virtual platform. It’s a unique alternative to traditional banking and frequently comes with lower interest rates for borrowers and higher yields for investors.
Peer-to-peer lending cuts out many of the costs typically associated with taking out loans through a bank. There are no physical branches to support, and staffing is generally a much less substantial expense for P2P lending companies.
How does the peer-to-peer lending process differ from bank lending?
From the borrower’s perspective, the application process starts much of the same way as any other loan process. Most peer-to-peer lending platforms allow for prequalification that only requires a soft credit pull. This gives you an idea of what kind of personal loan you could qualify for and with what terms. At this point, the lending platform gives you a loan grade, which classifies your application as a risk rating.
Next, your funding request is posted on the P2P lending platform. Investors can review the details of your inquiry, such as what you’ll use your loan funds for, non-identifying aspects of your application, and their anticipated return. If interested, the investor can then commit any amount of funds to your personal loan. Once you reach a certain percentage of committed funding, your loan application moves onto the next level.
You’ll need to submit information to verify your application, like proof of income and any other documentation required by the lender. It then goes to underwriting and you’ll receive an official loan agreement. The agreement will outline the details of the loan, including rates, terms, and your repayment responsibilities.
After you sign and submit the loan agreement, the loan funds are typically deposited into your bank account within 24 to 48 hours.
Because there are extra steps involved in the approval process for a P2P loan, it can take longer to get your funding when compared to traditional lenders. However, borrowers can often qualify for more competitive rates and terms.
The upfront transparency of each borrower’s credit rating offers low credit borrowers a chance to qualify for a loan, even if traditional financial institutions have denied them.
Peer-to-peer lending platforms also offer a wide degree of flexibility on loan use. They’re all different. However, most typically allow for common funding purposes such as debt consolidation, home improvements, life events, and other significant purchases. Of course, your exact need could influence which P2P lender you ultimately choose.
Investors are regularly drawn to peer-to-peer lending platforms for the pure fact that returns are often higher than other investment choices. Plus, you get to administer as much control as you’d like when managing your portfolio. That’s because you can choose how much you invest at any given moment, in addition to what mix of loan grades you want in your portfolio.
Alternatively, you’re also able to set your investments on autopilot with most of them. You typically can input how you’d like your investments to be distributed. The peer-to-peer lending platform will then automatically disburse your funds to loan requests that meet your criteria.
This frees you up from having to manually review borrower requests, making the process as simple as you want it to be. While P2P lending certainly contains a significant degree of risk, some investors may decide to make it a part of their portfolios.
There are several reputable peer-to-peer lenders online today. Here is a breakdown of the best ones to help you select the right one, whether you’re interested in borrowing or investing.
