Best Peer-To-Peer Lending Sites For Borrowers And Investors

There are many reasons why a person would want to take a loan, some of which are business expansion or financing, mortgage, investing, borrowing, education funding, marriage funding, etc. A lot of lending platforms offer a variety of loan options to borrowers. The lending platforms differ by their services, interest rates, and repayment plans. Traditional lenders and online lenders both have their perks, and they both work perfectly for different kinds of borrowers. While both traditional lenders and some online lenders function as a middle man or direct borrower, other online lending platforms have simply created a platform where individual lenders and borrowers meet without the interference of a financial institution middleman. This type of lending is called peer-to-peer lending or P2P.  They type of lending can be provide a big opportunity for borrowers and investors.

What is Peer-to-Peer Lending?

Peer-to-peer lending is also known as P2P, crowdlending, or social lending. It is a type of lending where lenders and borrowers meet directly on an online lending platform. This concept which only started in 2005 has since developed over time, and has slightly over 30% of Americans using it. According to a Transparency Market Research report P2P market worth about $86 billion in 2018, and the worth is most likely to increase to $898 billion by 2024. The market has since grown with platforms like Lending Club, Upstart, Streetshares, and Prosper topping the market. 

P2P loans are unsecured personal loans and business loans that involve lesser amounts of money (between $2,000 - $40,000) compared to traditional or conventional lenders who can loan out high amounts of money matching the borrower’s creditworthiness, net worth, and any other relevant detail.

“Peer-to-peer lending, also known as P2P lending, is a technology-enabled system where individual investors fund loans (or portions of loans) to individual borrowers. Also called marketplace lending, peer-to-peer lending is a growing alternative to traditional lending”

How Does P2P Work?

In peer-to-peer lending, the borrowers are directly matched to the lenders which in most cases are investors through an online lending platform. The lenders/investors will then have to decide which of the available loans they would like to fund. Without the interference of any banking or financial institution, borrowers can easily and quickly access loans and investors or lenders earn more interest compared to traditional banking. Rather than have loans first underwritten and approved by a banker peer-to-peer lending platforms grants all parties direct access to each other.

Other Things to Know About P2P

The beauty of peer-to-peer lending is that both borrowers and investors stand to get something. For borrowers, this types of lending serve as a good alternative to conventional payday loans or credit cards. Borrowers who benefit the most from P2P are borrowers with high credit scores and good credit history as refinancing to a lower-interest loan on Peer-to-peer platforms can help save some money. However, borrowers with poor credit scores will be charged higher, though, there are also various cheap lending platforms that such borrowers can borrow from.

For the lenders, P2P can serve as a really good investment plan. If a loan investment goes well, the lender is entitled to the full returns without interference with any banking or financial institution. The word ‘if’ is being used because there can be cases where a loan goes default as a result of the borrower failing to complete payment—necessary legal actions can be taken in such an event. Therefore, as an investor, it is best to first consider all the possible risks associated with funding a loan/ making an investment before committing your money to it. Another perk P2P may have for an investor is portfolio diversification.

It has been established that different lending platforms have specific features that distinguish them from one another. For example, platforms like Prosper and LendingClub accepts all kinds of investors and borrowers so long as they meet the account minimum requirement alongside creditworthiness. While other firms strictly accept only accredited investors who have a personal income of at least $100,000 or a net worth above $1 million and qualified borrowers who have at least $5million in assets. Still, some firms only accept institutional investors like commercial banks, insurance companies, or hedge funds.

Getting Started on P2P

To get started on a peer-to-peer lending platform, the investor/potential lender would first have to open an account with the platform and deposit an amount of money to be loaned out. The loan applicant also signs up with the platform after passing a thorough assessment. The loan applicant will be provided with different lending offers to choose from. Once that has been done, the money is then transferred directly to the borrower within 2 to 14 days, and all monthly repayments will be done through the platform.  Investors can decide to either fund a single loan or multiple loans while a borrower can also break to bits his/her loan to receive loan funds from multiple investors. The loan minimum goes down to about $25.

P2P Loan Requirements

Following the P2P procedure stated above, the borrower would have to meet certain requirements before becoming eligible to request a loan on any P2P platform. The loan requirements and loan types may differ according to each platform. General requirements include age limit of 18 years and above, SSN, proof of ID, and a verifiable bank account. Personal information such as name, date of birth, home or business address, phone number, and email address will also be required

Personal loan requirements;

• Credit score
• Salary
• Proof of employment
• Debt-to-income ratio
• Credit history
• Proof of housing or mortgage payments
• Educational history
• Other outstanding debts (if any)

Business loan requirements;

• Active business years
• Personal and business credit score
• Revenue and profits
• Debt service coverage ratio
• Tax returns
• Balance sheets
• Profit and loss statements

All provided information will be verified by the lending platforms through photocopies of the applicant’s ID cards, or W-2 forms.

Getting Started on P2P as a Borrower

• Fill an application by providing the necessary credit details required by the lending platform. The purpose of this is to run a quick credit check on your credit score. Once the credit check result is out it would tell potential lenders whether or not to go ahead with the process—the result reveals whether the applicant is low risk or high risk.
• Once the applicant passes the credit score test the next step is documentation which includes full name, proof of identity using any government recognized ID card, SSN, proof of employment, total income, outstanding debts (if any), and any other relevant information needed for documentation.
• Using an algorithm, the lending platform processes the data provided by the borrower, once qualified, the borrower has access to apply for a loan.
• Potential lenders will be able to view necessary details about the borrowers, and loan money to them based on their profile.

Tip: Borrower applicants may qualify for a very competitive interest rate depending on their credit score. Those who do not meet the credit score average are likely to find high-interest rates on each loan. The loans may even go higher than the average credit card APR.

P2P for Lenders

Peer-to-peer lending may be popular amongst American, yet restricted in some states. For states that allow P2P lending or investing, it is expected that the investors meet certain requirements before they can participate in P2P. Once again, the requirements differ from lending platforms. For platforms like LendingClub and Prosper the requirements are as follows;

• Gross income and net worth of at least $70,000 and $85,000 in CA. 
• Minimum account balance of $1,000 and a $25 minimum investment
• Taxable income account or IRA (this option is open to investors who would like to invest through this type of account)
• Agreement to an annual 1% fee

Other investors like Upstart and Funding Circle may have a few additional requirements such as;

• An investor must be accredited by SEC
• Minimum account opening of $50,000 
• Minimum investment of $500 per loan
• Taxable income account or IRA
• Agreement to a 0.083% monthly loans service charge

Types of P2P Loans

There are several types of peer-to-peer loans. Each loan type has different rules that govern them just as the different lending platforms have various features that distinguish them from each other. The loans offered by peer-to-peer lending are similar to that of traditional lending. They include:

• Personal Loans: This is an unsecured P2P loan is taken to fund personal interests such as education, wedding, home improvement, or buying a car. It can also be useful in debt consolidation. If you have a good credit score not less than 630, you can access up to $35,000 loan with a good interest rate and two to five years repayment term. The interest rates usually differ according to borrower’s credit scores
• Business Loans: This type of P2P loan is reserved for both small and large business owners for business funding or expansion. Only a few peer-to-peer lenders offer this service to investors and purchasers. Some lenders like Upstart require a business to be at least six months old before applying for a loan while other sites require that a business be at least two years old before applying. The loan amount also differs by lending platforms, however, sites like Funding Circle offers purchasers loans as high as $500,000.
• Healthcare Loans: This type of loan is reserved for healthcare, though some lending platforms allow borrowers to take out from their personal loans to fund healthcare too.

Best P2P Lenders for 2020

Here’s a comprehensive list of top P2P lenders to consider in 2020:

LendingClub

Loan Type: Personal loans, business loans

Loan Amount: $40,000 (personal loans)

Lowest Interest Rate: 5.32%

APR: 6.95% - 35.89%

Repayments: Fixed monthly payments

Accessibility: Open to all

Prosper

Loan Type: Personal loans

Loan Amount: $40,000 

Lowest Interest Rate: 3%

APR: 6.95% - 35.99%

Repayments: Fixed monthly payments

Accessibility: Open to all

Upstart

Loan Type: Personal Loans

Loan Amount: $35,000

Lowest Interest Rate: 4%

APR: 7.46% - 35.99%

Repayments: Fixed monthly payments

Accessibility: Open to all

Funding Circle

Loan Type: Small business loans

Loan Amount: $25,000 - $500,000

APR: 4.99% - $39.6%

Lowest Interest Rate: 5.49%

Repayments: Fixed monthly payments

Accessibility: Open to all

SoFi

Loan Type: Personal loans, student loan refinancing

Loan Amount: $5,000 -$100,000

APR: 5.95% - 12.99%

Lowest Interest Rate: N/A

Repayments: Fixed monthly payments

Accessibility: Qualified purchasers

Peerform

Loan Type: Personal loans

Loan Amount: $1,000 - $25,000

Lowest Interest Rate: 6.44%

APR: 7.12% - 29.99%

Repayments: Fixed monthly payment

Accessibility: Accredited investors

StreetShares

Loan Type: Small business loans

Loan Amount: $2,000 - $250,000 

APR: 8% to 39.9%

Lowest Interest Rate: N/A

Repayments: Fixed Monthly payment

Accessibility: Accredited investors

ApplePie Capital

Loan Type: Small business franchise loans

Loan Amount: $100,000+

Lowest Interest Rate: 7.75%

APR: 9% - 16%

Repayments: Fixed monthly payment 

Accessibility: Accredited investors

Avant

Loan Type: Personal loans

Loan Amount: $2,000 - $35,000

Lowest Interest Rate: N/A

APR: 9.95% - 35.99%

Repayments: Fixed monthly payment

Accessibility: Institutional Investors

Lending Platforms’ Gains

There’s always a catch! The financial firms that provide this loan service also make some gain— still nothing compared to traditional lenders. Peer-to-peer lending platforms generate revenue by charging fees on every transaction made—that is, charging borrowers fees and taking a percentage on the investor’s interest gotten from the loan. Borrowers are also charged extra fees on late loan repayment. Usually, origination fees range from 1% to 6% of the loan amount, i.e. if a borrower takes a loan of $300, the lending platform is entitled to either 1% or 6% of the total loan amount.

 Pros

• Quick online access
• Lower charges
• Supports fixed monthly payments
• Lower interest rates range
• Creditworthiness leniency
• Automatic repayments
• Supports portfolio diversification

Cons

·       Loan limits (between $35,000 to $45,000)

·       High-interest rates for borrowers with poor credit scores (credit score average is 630)

·       Some lending platforms have high origination fees of 6%

·       Late repayments attract extra charges

·       No FDIC insurance like a savings account or certificate of deposit

·       Some platforms only accept accredited investors

·       Risk of investors losing their money if borrowers default.

Conclusion

Peer-to-peer is considered as an investment for lenders because of the interest rates and low-risk rates that come with loans. Peer-to-peer lending offers lots of benefits for the borrower such as lower interest rates, favorable loan terms, and lesser fees. While for the lender, it offers better returns on cash saving compared to bank savings or certificates of deposits.