Peer-to-peer loans: how do they work?

P2P lending is a way of borrowing without going through a credit union or traditional bank. If you need a loan, you should consider P2P lending when shopping for a loan. Do you have good credit? The rates for this loan can be very low for you.

However, if your credit is bad, you can also get an affordable peer-to-peer loan from an online lender.

What is P2P lending?

Investors and individuals instead of banks give P2P loans. Persons who have extra money to lend choose to loan it to others who need it. P2P services such as websites match a lender with a borrower, making the process of borrowing easier for both parties.

Benefits of borrowing from peer-to-peer lenders

Peer-to-peer loans are not always better than credit union or bank loans but they have a few features that make them a great choice:

Low costs

When taking out a P2P loan, you can do it at a relatively low cost. You just need to pay enough interest to keep the lender happy: it goes towards compensating your lender. With credit union and bank loans, the overhead costs for large workforces and branch networks, make loans more expensive.

For this reason, P2P loans are a better option than using credit cards. When taking out this loan, you should expect to pay an origination fee of between 1-5 percent of your total loan amount. Compared to personal bank loans, this fee can be high, but it is much cheaper than that of taking out a second mortgage.

Quick and easy

Shopping for loans is not that easy. After application, you have to wait to hear back from the bank or credit union. P2P borrowing eases some of this pain because the application process is easy and you do not have to wait that long for approval.

Although the actual funding takes a few days longer, at least you will not have to sit around wondering whether your loan was approved.

Blemishes in your credit can be tolerated

In a world where lenders are unwilling to loan money to people with bad credit, P2P lenders are an attractive option. However, your FICO score needs to be good – having a score in the mid 600’s is best. Just remember that the worse your credit is, the more you will have to pay for your loan, as is the case with most loans.

Types of P2P loans

This loan started out as an unsecured, personal loan that you could borrow for any purpose and collateral was not necessary. It is still the most common loan type because of its flexibility: you can use the money to consolidate debt, do home improvements, or buy a new car. Do you want to borrow money to fund higher learning? You need to let the lender know.

Over time, specialized P2P lenders have begun offering loans for particular uses – such as for business startups – and loans that need collateral to secure them.

Popular P2P lenders

The number of P2P lenders is always growing, but Lending Club and Prosper.com popularized this concept. When looking for this loan, you should consider getting a quote from both of these sources. Whatever you do, make sure that you read reviews for top peer to peer business loans for poor credit when looking for business loans.

Only apply to reputable lending services because you will be providing sensitive information that you do not want to get into the wrong hands. If you fail to qualify for P2P loans, you should try your luck with other online lenders who specifically deal with bad credit borrowers.