Also referred to as social lending or crowdlending, peer-to-peer lending is an investment platform where business owners or individuals can get loans. With peer-to-peer lending, there aren’t any monetary organizations posing as the middleman because P2P lending connects lenders directly to their investors.
Also, peer-to-peer lending has existed as a successful alternative system to traditional banks ever since 2005. Let’s discuss how peer-to-peer lending works as an investment option and is peer-to-peer lending safe for you.
Table of Contents
What is peer-to-peer lending and how does it work?
To fully explain the concept of P2P lending, we will need to first define peer-to-peer lending, and then we can talk about how it works. Peer-to-peer lending is the act of lending money to business owners or individuals through an online platform that links the lender to the borrower. Essentially, lenders and borrowers are directly connected.
How does P2P work?
As stated earlier, peer-to-peer lending is a system of lending money to individuals. If you apply for a P2P loan, here are the steps you can expect.
- Complete your application and submit it online. Usually, a credit inquiry is often included. Whether the inquiry is a soft or hard credit check depends on your circumstances.
- A risk category or grade will be assigned to you by the lending platform. Your loan rate will affect the interest rate imposed on your P2P loan, as well as terms of your loan. If you agree to the offer, you will move on to the next step.
- Your loan request will be reviewed by investors. You might be required to include what you intend to spend the money on, and you might also need to state why lenders can trust you with their P2P loan.
- Banking on how the platform is structured, lenders may make proposals to win your business.
- If an investor makes an offer that you are happy with, you can then accept the loan. However, before you accept the loan, make sure you review the terms of the loan to make sure they are exactly what you agreed upon initially.
- When these steps are completed, the money will be deposited into your account ASAP. Sometimes, the transaction happens immediately but in certain situations, you might need to wait a week before receiving your loan.
Generally, P2P lenders report accounts to the credit bureaus just like traditional lenders do. So, if you don’t repay your loan on time, your credit score may be affected. Also, your overall borrowing cost might be increased if you make late payments because lenders might impose late-payment fees on your account.
How do I borrow peer-to-peer money?
Peer-to-peer lending is a means of lending money to businesses or individuals without a financial institution posing as an intermediary. So, before you can borrow P2P loans, the lender will conduct several background checks, like looking at your credit history and reviewing your personal employment history. The standards are somewhat rigid, and people with high credit risks are often not allowed to borrow P2P loans.
If you are accepted, then the P2P lender will assign you to a risk category. Once you are given a risk category, you can begin to borrow loans that are set at the risk category you received.
Either you’ll go through the first method of lending, or your loan will be auctioned off to members with the funds available for your loan. The lender or bidder will see the relevant information that you submitted on the P2P lenders’ site, meaning they’ll know why you need the fund as well as your trustworthiness before agreeing to discuss the loan with you.
From there, an initial interest rate will be set for your loan, and then, bids will start being accepted. If the loan is fully funded, then lenders can offer lower interest rates in an attempt to outbid other lenders and win the auction.
Peer-to-peer lending fees
To get a P2P-funded loan, you have to pay an upfront fee that ranges between 1% and 5% to the organization. If the origination fees are not paid on time, late charges will attract a $15 or 5% increase of the unpaid payment depending on which value is greater.
If you decide to pay via check rather than through direct deposits, you’ll be charged an extra $15 per late payment. Also, failed payments result in a $15 NSF charge per draft attempt.
Another qualification requirement is that your debt-to-income ratio (DTI) stays below 40%, and you also need to have an active, open account at a financial institution of your choice.
Your credit score report should also show at least one revolving account. It must also be free of current bankruptcies, collections, or other delinquencies within the past 12 months.
Pros of peer-to-peer lending
A few advantages of peer-to-peer lending are as follows:
- Compared to other types of investments, P2P lending normally yields greater returns to the investors.
- Peer-to-peer lending is a more accessible supply of funding than conventional loans from financial institutions.
- Peer-to-peer loans commonly come with lower late fees because of the higher opposition between lenders and lower origination fees.
Peer-to-peer lending risks
Regardless of how beneficial P2P loans may seem, there are still a few risks associated with peer-to-peer lending. Some of these disadvantages include default risks, poorly-informed investors, agency risks, and investment liquidity.
- Default risk and poorly-informed investors: P2P operators provide access to asset classes. Oftentimes, investors usually have little to no experience with providing access in the first place, meaning they will not fully understand the true nature of the risks associated with P2P lendingt.
- Agency risk: Investors are faced with the possibility that a P2P operator may stop operations due to the unprofitability of the business. The borrowers are not in a place to default here.
- Investment liquidity: The maturity matching of debtors and traders makes P2P investments largely illiquid. P2P operators might advance to secondary markets, and many P2P operators do just that. Asymmetric records do not have to not be an obstacle to secondary markets given a booklet of borrower traits and compensation performance of loans.
Safe and economical peer-to-peer alternatives
Peer-to-peer alternatives give you the ability to make choices that suit you best. These alternatives are often safer and more economical. A few of these peer-to-peer alternatives include Instacash and credit builder loans!
0% interest Instacash advance up to $250
Instacash is a short-term cash float from MoneyLion that allows you to access up to $250 instantly with 0% interest. With Instacash, you’re able to get cash advances whenever you need them.
The cash you receive through Instacash can be used to cover anything, from fun opportunities to unexpected life expenses. This is a good alternative to expensive P2P lending because P2P lending doesn’t offer you access to funds at a 0% interest rate.
Same-day funding Credit Builder Loans
Credit Builder Plus is a MoneyLion membership that helps you build and rebuild your credit. Even if you’re new to credit or you’ve been generally unable to access financial products, a Credit Builder Plus membership lets you gain access to loans up to $1,000 without a hard credit check.
The majority of Credit Builder Plus members witness their credit scores improve within the first 60 days!
The MoneyLion way
Is peer-to-peer lending safe? Well, like any other investment, it does put your capital at risk. However, given the predictability of the repayments from debtors and other safeguards in P2P, there are plenty of other investment types that are riskier than peer-to-peer lending.