Even if you've borrowed money dozens of times, you may be asking yourself, "What is peer-to-peer lending?" Peer-to-peer lenders offer an alternative to borrowing money from your local bank. Here's what peer-to-peer lending is and how it works.
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On this page:
- What is peer-to-peer lending?
- How it works
- What are some peer-to-peer lenders?
- Alternatives to peer-to-peer lending
What is peer-to-peer lending?
Peer-to-peer lending (referred to as P2P) matches people who need a loan with individuals willing to loan money. Most P2P loans don't require collateral.
The entirety of your loan may be funded by a single investor or by many investors pitching in smaller amounts. No matter how many investors are involved, final funding is handled through the P2P marketplace to which you applied.
How much can I borrow with a P2P loan?
Some P2P lenders offer loans up to $40,000, while others max out at $10,000. Before applying for a loan through a P2P lender, be sure to check the lending limits. For more information on loan amounts, see our guide to how much you can borrow with a personal loan.
What credit score do I need for a P2P loan?
You typically need a score of at least 580-600 to get a P2P loan. However, the minimum credit score for a loan varies by lender.
If you have a low credit score, compare the rates available from a P2P loan with the rates and terms available through another lender that makes personal loans for bad credit.
How it works
Borrowing money from a P2P lending platform is similar to borrowing from a traditional lender:
- You log into a peer-lending platform and submit a loan application. This does not affect your credit score.
- The lender assigns a risk grade to your application based on your credit score, income, and other factors.
- Individuals interested in loaning money (known as "investors," because they are investing in you, the borrower) review your application. Don't worry: Your identity is not disclosed. In this step, investors simply examine your qualifications and decide if they want to lend you money.
- If one or several investors sign on to fund your loan amount, the lender approves the loan.
- You then provide documents that verify your information, like ID and paystubs.
- The lending platform runs a "hard credit check" to make sure all the information is still accurate. A hard check dings your credit score a bit, but your score should quickly rebound with regular monthly payments.
- Once final approval arrives, the funding process begins. The amount of time it takes to get the money into your bank account varies by lender, but can be anywhere from several days to three weeks.
What are some peer-to-peer lenders?
These four P2P lenders represent some of the biggest names currently in the business:
- Upstart
- Prosper
- Peerform
- Funding Circle (for business lending)
Alternatives to peer-to-peer lending
If you find yourself in an emergency situation and need funds in your bank account quickly, there are alternatives to P2P lending. For example:
0% promotional rate credit card
If you have a strong credit score, there's a good chance you qualify for a 0% intro APR credit card. This means you won't pay interest during the card's "promotional period" (usually 12-18 months). When that promotional period ends, you'll start paying interest at the card's regular rate. A 0% promotional rate credit card can be a good option if you know you'll be able to completely pay off the card before the end of the promotional period.
Your current bank or credit union
If you have trouble finding a loan, talk to your bank or credit union. No matter your credit score, your financial institution may use a different approval method. For example, it can view how often you make deposits, how much you have in savings, and more. It may be open to loaning you money because it knows you better than other lenders do.
Other online lenders
No two online lenders are exactly alike. Whether you need a personal or business loan, if you decide that a P2P lending company is not for you (or your application is denied), check out other online lenders.
No matter which financial institution you shop, don't just check the loan interest rate. Also ask if there's a loan origination fee or other built-in costs that will end up making the loan more expensive.
The peer-lender approach offers an innovative twist on personal loans, but doesn't represent the only game in town. Before signing on the dotted line as a borrower, be sure to shop around and find the loan that best fits your needs.
RELATED: The Best Peer-To-Peer Lenders
FAQs
You may very well land a loan through a P2P, but if your score is very low you can expect to pay a higher interest rate. That's because the investor(s) who want to loan the money are taking a bigger risk.
You can expect to have plenty of loan offers at your disposal. However, if your credit score is good or excellent, be sure to shop around. Chances are, there will be competition for your business.
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By:Dana George
Writer
Dana George has a BA in Management and Organization Development from Spring Arbor University. For more than 25 years, she has written and reported on business and finance, and she's still passionate about her work. Dana and her husband recently moved to Champaign, Illinois, home of the Fighting Illini. And though she finds the color orange unflattering on most people, she thinks they'll enjoy Champaign tremendously.
Fact CheckedEric McWhinnie
Eric McWhinnie has been writing and editing digital content since 2010. He specializes in personal finance and investing. He also holds a bachelor’s degree in Finance.
