What are peer-to-peer loans?
Peer-to-peer loans started with the idea of connecting borrowers and investors directly. They became popular for borrowers, especially those with low credit scores, after the 2008 financial downturn when many traditional banks’ lending requirements tightened. Peer-to-peer offered a better shot at getting money.
Today, the original “retail” form of peer-to-peer lending — where individual consumers invest in portions of loans — has evolved to include institutional lending, where institutions like hedge funds or insurance companies back the loans. LendingClub ended its program for individual investors in 2020 and now facilitates institutional lending. Prosper still allows consumers to invest in fractions of loans.
How does peer-to-peer lending work?
To get a peer-to-peer loan, borrowers follow the same process as they would for getting an online loan.
Retail and institutional peer-to-peer lending companies check eligibility through pre-qualification, which involves a soft credit pull that doesn’t have an impact on your credit score.
Pre-qualifying allows you to select a loan amount and loan purpose while providing your name, date of birth and address. Then, you can see the annual percentage rate and loan terms you could be eligible for.
If you decide to apply, peer-to-peer lenders, like other lenders, confirm additional factors such as your credit score and credit history, which involves a hard credit check.
Features of peer-to-peer loans
Peer-to-peer loans are a type of online loan and share these common features:
Origination fee: This is an upfront fee that peer-to-peer lenders charge to cover the cost of processing your loan. The fee typically ranges from 1% to 8% of the loan amount.
Online experience: Peer-to-peer lenders allow borrowers to manage everything on the lender’s website, from applying for a loan and uploading documents to signing the loan contract and making monthly payments.
Since applications for peer-to-peer loans might be reviewed by multiple investors, they can take longer to fund than personal loans from banks or other online lenders — up to a week, in some cases.
Peer-to-peer loans for small businesses
Funding Circle and StreetShares are peer-to-peer lenders that offer only small-business loans. FundingCircle is aimed at businesses that need funding to expand, while StreetShares is better suited to newer businesses looking for working capital.
Can you get a peer-to-peer loan with bad credit?
Peer-to-peer loans can be an option for bad-credit borrowers (those with FICO scores of 629 or below), but they may have higher interest rates. For example, a four-year, $15,000 loan with a 28.7% APR would have monthly payments of $529 and an overall interest cost of $10,392. You can calculate average rates and payments using a personal loan calculator.
How to pre-qualify for a peer-to-peer loan
You can pre-qualify for a peer-to-peer loan to see estimated rates and terms before you formally apply. The pre-qualification process usually involves a soft credit check, which doesn't have an impact on your credit score. You can pre-qualify on NerdWallet and compare loan costs and features from multiple lenders.
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P2P Credit offers personal loan access to borrowers with bad credit. Traditional banks often deny loan applications from borrowers with credit scores less than 680. However, with peer to peer lending, you are likely still eligible to get a loan with a fair interest rate – even if you have bad credit.
If your loan application has been denied because of your credit history, or if you are unsure of your credit score, apply now or check your rate to see if you qualify.
Traditional Loans vs P2P Loans:
Traditional banks have high overhead and narrow margins which makes it unappealing for them to extend credit to borrowers with bad credit. P2P Lending is different. Peer to Peer loans are funded by individuals (or groups of individuals) through efficient online platforms with very low overhead. This is the key difference which makes P2P personal loans for bad credit an attractive option. When traditional banks have no choice but to decline a loan application, P2P lenders can offer a financial product with reasonable, fixed interest rates.
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