Peer-to-peer lending is a term you might have heard of, but what is it?
Peer-to-peer (P2P) lending is an alternative for borrowers who want to avoid traditional financial institutions and prefer dealing with investors who may be interested in financing their loans. Peer-to-peer lending is on the rise. The global peer-to-peer lending market is predicted to reach a value of $1.14 trillion by 2031, according to a research report by Transparency Market Research (TMR). The market is expected to grow at a Compound Annual Gross Rate (CAGR) of 29.3% from 2022 to 2031. Unlike how it may sound, peer-to-peer lending isn’t necessarily sourcing funding from your peers.
How does peer-to-peer lending work?
If you need a loan for a business expense, for example, you could go to a peer-to-peer lending site and fill out a loan application. This will likely include a credit check. The lending site would then let you know if you were approved or not. If approved, the site will notify you of your interest rate.
Using online software, the peer-to-peer lending site will match your application with potential lenders. You will wait for investors to review your application and decide whether they want to fund it. An investor has the option to fund a portion or the entire loan amount. You could have money coming from several different sources.
If your loan is funded, the money will be electronically transferred to the bank account you provide in your application. Similar to a traditional loan, you will repay your P2P loan with monthly payments. Your payment will be divided between the investors.
What’s in it for the investors?
Investors have varying goals. One investor might want to play it safe and only loan small amounts to a larger group of people, hedging their bets in case someone can’t repay. This creates a lending portfolio that is a mix of high and low-risk investments. However, the fewer risks an investor takes, the less they can earn from interest payments. Some investors will take on risky loans in hopes of earning higher returns.
Benefits of peer-to-peer loans.
Some P2P sites can offer more attractive interest rates than traditional banks, especially if you have a good credit score. If you have a lower credit score, you might have a better chance of finding an investor who will fund your loan. Some platforms allow you to pay your peer-to-peer loan off early or make overpayments without penalties. You can borrow money for a wide range of purposes, including business expenses.
Disadvantages of peer-to-peer loans.
You could be charged fees on top of the interest rate charged for your P2P loan. You might have to pay a higher interest rate than other lenders would charge. You could be declined for funding if your financial profile isn’t strong. If you have difficulties repaying your loan, you might not receive the same protections you have if you were to borrow from a traditional lender. A peer-to-peer website could pass on your debt to a debt collection agency if you fall behind on payments, for example.
Alternatives
Personal loans are a great alternative to peer-to-peer lending. You could seek a personal loan from traditional banks, credit unions, and online lenders. They can be used for just about any expense and are convenient and fast.
If you are having issues getting approved for funding or worried about your credit score, Uprova can help. We work with borrowers with a variety of financial backgrounds. You can check your rate online today without impacting your FICO credit score.
Summary
Peer-to-peer lending is growing. It’s a way to borrow money from investors instead of using traditional banks. The loans can be used for a variety of expenses, and you could get approved despite not having the best credit.
However, peer-to-peer loans come with fees and your interest rate could be higher. If you need fast funding, you could consider personal loans instead. Uprova lends to borrowers with varying financial backgrounds.