A popular alternative to traditional loans, peer-to-peer lending involves applying for a loan on an online platform. The loans are unsecured, i.e., no collateral is required, and they are financed by one or more investors or peers. Also known as P2P lending, this type of lending process was first started in 2005 by Zopa, a UK-based company. Over the years, P2P lending has found takers all over the globe. Right from paying off credit card debt to starting a small business, many people have turned toward P2P lending. Applying for peer-to-peer loans You can directly apply online for your P2P loan. The application process can be done quickly in just a few minutes. Just go to any P2P marketplace. You will have to first ensure that the lender provides their services in your state of residence. Next, you will have to state that you are at least 18 years old. Select the type of loan you want—personal or business. Based on the type of loan, you will have to provide the lender with your personal information. For a personal loan, you have to provide your employment status, salary, debt-to-income ratio, credit score, and credit history. If you are applying for business loans, you will have to provide your personal credit score, business credit score, revenue, and debt service coverage ratio. Before applying for a P2P loan, make sure that you have a verified bank account and Social Security number (SSN). Documentation required for peer-to-peer loans Documents for personal loan application include W-2 forms and pay stubs. These are required to verify your income and other personal details. If you are applying for a P2P business loan, you will have to provide all the business financials, balance sheets, profit and loss statements, and tax returns. Advantages of peer-to-peer lending For borrowers, one of the biggest advantages of a P2P loan is the quick online application experience. Another important advantage is that credit requirements are not as strict as those in a traditional bank. Even with a low credit score, you can apply for a P2P loan. The interest rates are quite low compared to traditional loans, especially if you have an above average credit score. Moreover, there are fixed monthly payments. With automatic repayments, it becomes easier to manage the loan. Additionally, there are no prepayment penalties. Also, there are no limitations on how you use your funds. The lender does not impose any restrictions. So, there is flexibility in the use of funds. For investors, P2P lending gives higher yields than a certificate of deposit (CD) account or savings account. Also, P2P lending is a good investment option apart from the usual bonds and stocks. Moreover, most P2P lending marketplaces let investors diversify their loan portfolio. So, funds are distributed across multiple loans, safeguarding against loss. Disadvantages of peer-to-peer lending Although P2P loans have relatively lower interest rates when compared to traditional loans, the rates may still be higher. For instance, if you have a below-average credit score, you may have to pay an interest rate as high as 36%. Moreover, if your credit score is below 630, you will not qualify for a P2P loan. Some P2P lending websites have high fees like origination fees of nearly 6%. Many borrowers also consider the low maximum limit of the loan amount ($35,000 to $40,000) as a disadvantage of P2P lending. If you miss a payment, it lowers your credit score. For investors, there is a high risk of losing money if multiple borrowers default on their repayments. Also, these loans are not insured by the FDIC like CD or savings accounts are. Moreover, there is less liquidity compared to bonds and stocks as the loans periods are usually quite long, from three to five years.
