Everything You Need to Know About P2P Lending

The concept of crowdfunding is familiar and known to all. It is when an individual funds a project online by raising money from as many donors as possible. The different donors chip in varying amounts till the target is reached.

Peer-to-peer lending works in a similar way.

People who are borrowing are looking for low-interest loans, and apply online using peer-to-peer lending apps or platforms. Once their request is approved, lenders can fund the loans, and in return, profit from the interest that the borrowers pay in order to secure their capital.  When the fixed term ends, the lender receives the original investment (principal), and a tidy profit. 

There’s an entire list of peer-to-peer lending platforms that offer better returns than legacy investment products, and considerably more than banks. 

As for the borrower, all being well, the collateral they’ve used to help secure their loan is returned to them.

Because of these reasons, P2P lending has grown on to become a serious buzzword in the community. But even then, there is some cloud of confusion around this. So, through this article, let’s shatter that cloud, and look into various aspects of P2P lending and P2P lending platforms that you should definitely know!

Let’s begin with the primary question:

Why Look for Peer-to-Peer Lending Apps?

Whether you’re a borrower or a lender, here are two good reasons in favor of P2P lending apps:

1. Offers You Full Control

Freedom -- something everyone seeks. In peer-to-peer lending, and therefore peer-to-peer lending applications, there’s no middleman lurking around to take their cut. Further, there’s no paperwork to slow down the entire process. It’s just the buyer and the lender. The platform is there to merely facilitate the meet. 

Depending on the list of P2P lending platforms, the lender can set their interest rates, too. This can then be matched to a suitable candidate, which makes the process a lot more convenient. Compared to the traditional bricks and mortars system, this is quite empowering!

Even the borrower can select their term and have their interest adjusted accordingly, thereby being in control of the entire process. 

2. Provides You With Flexibility

Unlike traditional systems where you could invest in just one loan, using P2P lending applications, you can spread the holdings across different loans. Further, you can decide on the amount, interest rate, and term of your investment for each note, and the platform will match you with someone willing to borrow on your terms. This gives you total control over your lending.

These are two broad benefits that come with P2P lending applications, and P2P lending in general. Other than this, there are borrower- and lender-specific benefits, too. Let’s look at some of those:

Benefits for Borrowers

Benefits enjoyed by borrowers revolve around the interest rates, speed of the funding, higher funding rates, and the ease of application process. 

1. Ease of Applying

Getting approved is as easy as putting in a few lines of personal information in an online form. THis can be done from anywhere with access to the internet and a computer. Once applied, and approved, you need to wait for your loan to be funded.

2. Reduced Interest

Another benefit of P2P lending for borrowers is the bank-like interest rates. Even the largest P2P lenders quote rates of approximately 7% APR. Once approved, the borrowers will also be offered several payback timelines that range from one, three, or five years. The interest rate is adjusted according to the term selected. 

3. Higher Funding Rates

 The funding amounts in the p2p model have increased over time. As of today, the amounts are quite substantial and range from $1,000 to $35,000. Goes without saying, the higher you go up the spectrum, the more meaningful a project or purchase you’ll be funding.

4. Speed of Funding

Funding typically takes one week to three weeks, and it depends on the size of the loan required. Small loans under $2,000 are even filled in just a few days and funded in less than a week. This speed is extremely convenient for the borrowers as they have to wait less!

Benefits for Lenders

Lenders win by spreading their risk through a variety of transactions and getting returns above market rates. 

1. Reduced Risk

In case of P2P lending, the lenders are not generally big institutions. The majority of loans are filled in smaller increments by normal individuals. Lenders are obviously attracted to an alternative to the otherwise high risk and low rates provided through a traditional financial institution.

2. Lenders Choose

P2P lenders get the option of categorizing the borrowers and ensure that they pass identity verifications. Borrowers are given terms and rates associated with their credit score and other related factors in the algorithm. Lenders can choose to invest in loans that invest them. If they don’t like someone that is consolidating credit card debt, they can choose to not invest. 

3. High Returns

The returns average near 10% depending on the types of loans you choose and the term you opt for. In today’s market, a 10% return is definitely quite attractive. This is especially because it is diversified into large pools of pre-qualified and FICO verified borrowers.

With the benefits in mind, let’s look at a list of P2P lending platforms that are doing well:

List of P2P Lending Platforms

Here’s a list of peer-to-peer lending apps that are doing good in the market:

1. Peerform

Peerform has been around since 2010. It was founded by a group of Wall Street executives and offers applicants with excellent credit rates as low as 5.99%, but the maximum loan amount is only $25,000.

Pros:

• Competitive interest rates
• No prepayment penalties

Cons:

• Not too high loan maximum
• Not available in every region

To note:

• Borrowing range: $4,000 to $25,000
• APR range: 5.99%–29.99%
• Minimum recommended credit score: 600 FICO score
• Repayment terms: 3 or 5 years
• Fees: Origination fees range between 1% and 5%. Late fees are 5% of the unpaid payment or $15, whichever is higher. An extra $15 fee if you choose to pay by check instead of directly from your bank. Failed payments result in a $15 fee per draft attempt. Peerform doesn’t charge prepayment penalties.
• Other requirements: Less than 40% DTI (debt-to-income) ratio, and at least one active bank account. Credit report should mention at least one revolving account which should be free from current delinquencies, recent bankruptcies, or collections (except medical) in the last 12 months
• Time to receive funds: Distribution of funds takes place within 2-3 days, though processing could take additional time. 
• Restrictions: Funds received cannot be used to refinance student loans or for any other education-related expenses. Loans aren’t available to residents of Connecticut, Vermont, North Dakota, or West Virginia.

2. LendingClub

One of the giants in the P2P lending community, LendingClub was formed in 2007. Since then, it has issued over $50 Bn. in loans and connected more than 3Mn borrowers and investors. Through this, personal loan applications may borrow up to $40,000.

Pros:

• No prepayment penalties
• Prequalification available

Cons:

• Average origination fee is 4.86%
• Higher time taken to receive funds

To note:

• Borrowing range: $1,000 to $40,000
• APR range: 10.68%–35.89%
• Minimum recommended credit score: Not officially disclosed, but estimated to be around 600. Your credit score, history, and all other details will be scrutinized to predict your risk. To qualify for the lowest rates, you’ll require a high credit score, low DTI, and a lengthy credit history. 
• Fees: Origination fees range from 2% to 6%. Late fees are $15 or 5% of your unpaid payment, whichever is greater. LendingClub doesn’t have a prepayment penalty.
• Qualifications: You must be a U.S. citizen or a resident, or living in the US on a long term-visa, at least 18 years old, and also must have a verifiable bank account. 
• Repayment terms: 3 years or 5 years. 
• Time to receive funds: Four days or lesser.
• Restrictions: Iowa residents are not eligible.

3. Upstart

Founded by ex-Google employees, Upstart has been in business since 2012 and generated more than $6.7Bn in consumer loans. It is built on the mantra that “you are more than your credit score”, the company claims that its software can help identify “future prime” borrowers based, in part, on education and employment history, even if those applicants have sketchy or limited credit at the moment. 

Pros:

• Not just credit, but education and job history also considered
• Higher max loan amount than other P2P lending apps
• Extremely fast funding

Cons:

• Maximum APR of 35.99% is quite high
• Origination fee as high as 8%
• Low maximum loan amount of $50,000

To note:

• Borrowing range;: $1,000 to $50,000
• APR range: 8.13%–35.99%1
• Minimum recommended credit score: 620 FICO score
• Fees: Origination fees range from 0% to 8%. Late payment fees are $15 or 5% of your monthly past-due balance, whichever is higher. Upstart also charges $15 for returns of ACH transfers or returned checks and $10 (one-time fee) for physical copies of records.
• Other qualification requirements: This P2P lending app will check your credit reports and DTI ratio for any information like bankruptcy etc that might exclude you from a loan. You must be 18+ with a bank account, have a full-time job / or a job offer starting in the next 6 months, and verifiable personal details. 
• Repayment terms: 3 or 5 years
• Time to receive funds: 1 business day after acceptance of loan
• Restrictions: Residents of Iowa and West Virginia aren’t eligible.

4. Prosper

Founded more than a decade ago in 2015, this is the US’s first peer-to-peer lending app. Since then, Prosper has helped more than one billion borrowers in obtaining financing. Qualified applicants can borrow up to $40,000, with starting rates as low as 7.95%.

Pros:

• Lower max origination fee as compared to other peer-to-peer lending apps
• Extreme flexibility in terms of changing payment due dates

Cons:

• A bit slower in funding
• Requires you to have at least three open credit accounts

To note:

• Borrowing range: $2,000 to $40,000
• APR range: 7.95%–35.99%1
• Minimum recommended credit score: Not disclosed, reported to be 640
• Other qualification requirements: Your DTI ratio must be less than 50%, with some amount of stated income above $0. Credit reports must not indicate bankruptcy filings in the last 12 months, or have less than 5 credit inquiries in the last 6 months. You should also have at least 3 active accounts. 
• Fees: Origination fees range from 2.5% to 5%. Late fees are the higher of either $15 or 5% of the missed payment. In case you’re paying by check, you need to pay $5 or 5% of your payment, whichever is lower. 
• Repayment terms: 3 or 5 years. 
• Time to receive funds: Usually within 5 days.
• Restrictions: Not available to residents of Iowa or West Virginia.

5. Funding Circle

Funding Circle was founded exactly a decade ago and has 100,000 and more investors. The company has acted as a boon for small businesses, and has helped more than 80,000 small businesses access funding to reach their goals. So, if you have a business that’s been around for more than 3 years, have at least 660 FICO score, you can explore a P2P business loan from Funding Circle. 

Pros:

• Accessible for business owners with fair personal credit
• Quick access to funds

Cons:

• Requires the businesses to be more than three years old
• Credit inquiry difficult for general partnerships

To note:

• Borrowing range: $25,000 to $500,000
• APR range: 11.29%–30.12%
• Minimum recommended credit score: 660 FICO score 
• Other qualification requirements: The business must be at least 3 years old with no bankruptcy filings in the last 7 years. 
• Fees: Origination fees range between 3.49% to 6.99%. There are no prepayment penalties. Late payment fees are 5% of the missed payment. 
• Repayment terms: 6 months to 5 years
• Time to receive funds: Lesser than 3 days
• Restrictions: Nevada-based businesses aren’t eligible.

How to Choose the Best Peer-to-Peer Lending Apps? 

From the list of P2P lending apps, the various names listed have comparatively affordable rates, lower fees, and flexible amounts. In general, in order to evaluate a P2P lending application, here are the key things you should consider: 

• APRs (average as well as minimum and maximum)
• Available loan amounts
• Fees (including origination and late fees)
• Flexibility of repayment terms
• Time taken to fund 

Evaluate on these parameters, and you’ll be able to pick the best P2P lending application for your use case!

What is the Future of P2P Lending?

P2P lending has seen nothing but growth, ever since it was established. That trend does not look to stop any time soon. A report by the Cambridge Centre for Alternative Finance chartered a 43% growth in the UK's alternative finance in 2019, with the P2P consumer lending market worth around £1.17 billion, up from £909 million in 2015.

It’s worth noting that P2P lending is still a relatively young industry, and hasn’t been truly exposed to the complete stress test that legacy institutions have gone through over the decades. However, from how we’ve seen this nascent idea grow into existence, we can be sure that the future for P2P lending, and P2P lending apps seems quite bright!