Peer-to-peer lending offers opportunities for both borrowers and investors. It’s a relatively new platform opportunity for investors to lend directly to borrowers without the use of a bank. P2P sites take over the traditional lender role, screening applicants and matching them with investors to get you the funds you need.
How Peer-to-Peer Lending Works
There are two sides to P2P lending – the borrower and the investor. The peer-to-peer lender or company itself is the ‘middleman.’ The P2P site does all of the work behind the scenes including rating borrowers, matching with investors, disbursing funds, and collecting payments.
Applicants and investors can apply or invest in loans within a matter of minutes. The peer-to-peer site then does the rest.
The Peer-to-Peer Process for Applicants
Applicants or borrowers conduct the entire process online.
- Complete an online application
- Provide the necessary information or requested documents
- See your rates and available loan amounts
- Choose the loan
Once you choose the loan, the peer-to-peer company funds and services the loan. They use funds deposited by investors, unlike a bank that uses its assets on hand to fund loans. Many P2P sites fund the loan as soon as the next business day.
The Peer-to-Peer Process for Investors
Investors can be anyone with money to invest. Many sites, like LendingClub, allow you to get started with as little as $1,000. You choose how you want to invest, whether it’s $25 increments in a variety of loans to diversify your risk or you invest it all in one loan.
You set up your parameters, including what types of loans you’ll invest in. P2P loans typically offer yields between 3% – 8%, which is higher than other comparable investments, but they do come with the risk of default, which may leave you with a loss.
Investors receive monthly payments of principal and interest, much like a bank would collect. You have the choice to take the payout or reinvest the funds in another loan.
Benefits of P2P Lending for Borrowers
Borrowers benefit from peer-to-peer lending greatly because of the lack of the need for a bank. P2P sites typically create their own requirements, limiting who can borrow from its investors, but overall, P2P lending offers borrowers the following benefits:
- Quick application and funding
- Multiple offers based on your qualifying factors
- Less strict underwriting requirements
- No prepayment penalties
- No collateral necessary
Benefits of P2P Lending for Investors
Investors looking for a different type of investment and/or to diversify their risk realize the following benefits:
- High than average returns
- The ability to do ‘social good’ by offering loans to individuals
- Easy diversification of your investments
- Create your own portfolio
- Invest in both taxable and tax-advantaged accounts
Peer-to-peer lending gives borrowers a chance to secure affordable financing even with less than perfect credit. It also allows investors to make competitive earnings outside of the traditional stock and bond investments. Carefully choosing the right platform as a borrower or investor is the key to success with peer-to-peer lending.