Here is Everything You Need to Know About Peer to Peer Lending

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Peer-to-peer lending is slowly changing the financial landscape, giving alternatives to both borrowers and investors.

The peer lending market is expected to hit $312.6Bn this year, fueled in part by technological advancements in the industry that help platforms quickly evaluate loans.

Despite setbacks over the years, grey areas in regulation, and other challenges, today’s industry boasts numerous peer-to-peer lending platforms catering to all sectors of the economy. You’ll find platforms focused on consumer loans, small business finance, real estate development, etc.

Along with Europe, the US has a plethora of great peer to peer lending options to help generate passive income and help get you closer to your financial goals.

Today, we’ll be looking at some of these platforms and what makes them stand out. But first, let’s look at the peer-to-peer lending market. What is it? How does it function? What are the pros and cons compared to traditional credit facilities?

What is peer-to-peer lending?

Peer-to-peer lending, also known as crowdfunding, or social lending, is a form of borrowing where instead of a bank, borrowers connect directly with individual lenders through platforms. As such, peer lending eliminates the middleman resulting in better loan terms and other benefits.

Peer lending is not a new concept. People have been borrowing from each other for generations. For instance, an entrepreneur may borrow from parents and friends to kickstart a business. What has changed? Tech-enabled platforms are simplifying the process and bringing more people on board.

Peer to peer lending platforms facilitate the transaction and also set the rates and terms on loans. However, they do not own the funds. They only act as the marketplace, bringing together willing borrowers and lenders.

How does peer to peer lending work?

Borrowers

For borrowers, peer-to-peer lending eliminates the hassle of getting a loan. Unlike traditional financial institutions that demand mountains of paperwork and take forever to approve a loan, peer lending platforms require less documentation and approve loans faster.

They process loans faster because they use cutting-edge technology to evaluate loan risks. Indeed, most peer-to-peer loans are handled online and automatically, further reducing disbursement times.

While each peer-to-peer lending platform uses its own processes and procedures, there are similarities common to most. The process for borrowers typically follows these steps:

Borrower’s process

  • The borrower opens an account with details on their financial needs and situation. The peer lending platform runs necessary checks.
  • The borrower is assigned a loan grade based on their credit check. This score helps lenders evaluate creditworthiness and risks.
  • The borrower may be asked to submit supporting documents such as employment records, other debts, etc., for review.
  • The peer lending platform then evaluates, approves, and lists the loan so lenders/investors can fund it with proceeds forwarded to the borrower within a few business days.
  • Finally, the borrower services the loan (principal & interest).

On most platforms, personal loans range from $2000 and $35,000, with loan repayment periods ranging from a month up to five years.

Lenders / Investors

For investors, attractive returns are among the major reasons they participate in peer to peer lending markets. It also helps them diversify into different asset classes while offering an opportunity to fund social causes.

Investors have different processes. It goes something like this on most platforms.

  • Open an account on a peer lending platform and satisfy all “Know Your Customer” requirements.
  • Access the platform to view and evaluate loans. Investors can also use the auto-invest tool to evaluate and invest in loans automatically.
  • Allocate money to various loans to spread risk, then sit back and wait for the loan interest plus your principal.
  • Most peer-to-peer lending platforms have low minimum investment requirements making them ideal for even new investors.

Top peer-to-peer lending sites

1) Prosper

Prosper is one of the oldest and most popular peer-to-peer lending platforms in the U.S. Founded in 2005, Prosper has facilitated more than $12B in loans to more than a million people, according to their website.

Borrowing on Prosper

Borrowers can access up to $40,000 in personal loans on Prosper. Unlike most other peer-to-peer lending platforms, Prosper allows joint applications.

The loan comes with a fixed rate of either three or five years, with your monthly payment constant for the loan duration.

Pros

  • Easy funding process
  • Joint applications available
  • You can borrow two loans at once
  • No prepayment fee

Cons

  • Relatively high maximum APR of 35.99%
  • A high minimum origination fee of between 2.4%-5%
  • Late fees of $15 or 5% of the unpaid loan amount.
  • Borrowers with slim credit profiles not eligible

Investing with Prosper

Investors can choose from up to seven different loans “risk” categories.

Each category has an estimated rate of return and level of risk. Double A-rated loans have an estimated return of about 4.99 percent, B-rated loans return 5.77%, while the lowest-ranked, HR, or high-risk loans have an estimated return of approximately 11.74%.

The platform has a low minimum investment requirement of $25. With that, you can take up positions in different loans to spread out your risk.

Investor requirements

Prosper investors must meet specific requirements before they qualify for an account. These include:

  • An individual investor must be 18+ years with a valid Social security number and a checking or savings account.
  • Investors must reside in eligible states. These are Alaska, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon, Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.
  • Investors in Alaska, Idaho, Missouri, Nevada, New Hampshire, Virginia, and Washington must satisfy an additional financial requirement of at least $70,000 annual gross income and $70,000 net worth.

2) LendKey

LendKey is the premier peer-to-peer lending marketplace for student loans. Founded in 2009, LendKey connects people interested in private student loans and those refinancing student loans to credit unions and community banks.

LendKey is most suitable for consumers who want to compare different student loans from a single platform.

While LendKey originates and services all the loans through its platform, it’s the more than 13,000 partners who fund the loans. Consequently, loans have different terms and rates based on lender and state.

LendKey student loan terms

  • Fixed Rates: 4.99% – 9.01%
  • Variable Rates: 2.99% – 8.15%
  • Loan amounts: From $1,000 up to 100% cost of attendance (subject to aggregate limit)
  • Loan terms: 5, 10, and 15 years

Eligibility

  • Borrowers on LendKey must meet the following criteria:
  • Must be enrolled, at least half time in a degree-granting program or at an eligible school
  • Be a U.S. citizen or permanent resident.
  • At least 36 months of credit history and an annual income of $24,000 apply without a cosigner.
  • Have a GPA of at least 2.0 and show satisfactory academic progress based on your school’s guidelines.
  • Must be considered a legal adult in their state of residence.

While eligibility criteria vary by lending partner (banks and credit unions), LendKey only matches you to offers for which you qualify.

Pros

  • You can borrow up to 100% cost of school attendance.
  • No application fees, origination fees, or prepayment penalties
  • Potentially low-interest rates and favorable loan terms.
  • Simplified loan process
  • Apply with a cosigner if you have an annual income of less than $24,000 or short credit history.

Cons

  • Payments are required while you’re still in school.
  • Eligibility criteria vary based on the lending partner.
  • Borrowers can only refinance up to $125,000 for undergraduate student loans.

3) SoFi

SoFi, short for Social Finance, is a San Francisco based peer to peer lending platform. The company launched in 2011, founded by four Stanford Graduate School of Business students.

From its humble beginnings as a student loan refinancer, SoFi has grown to include other products and become a one-stop-shop financial provider.

Indeed, borrowers can use SoFi personal loans for a variety of…

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