P2P-PERSON TO PERSON LENDING

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Peer-to-peer lending is a popular alternative to taking out a traditional loan from a bank. Most peer-to-peer loans are personal loans, which borrowers can use for a variety of purposes from debt consolidation to home improvement, or small business loans.

  • What Are P2P Loans?

  • Pros and Cons of P2P Lending

  • P2P Lenders

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Peer-to-peer lending works differently than getting a loan from a bank or credit union. When you get a loan from the bank, the bank will use some of its assets, which are the deposits made into accounts by other customers, to fund the loan. With peer-to-peer lending, borrowers are matched directly with investors through a lending platform. Investors get to see and select exactly which loans they want to fund. Peer-to-peer loans are most commonly personal loans or small business loans. Peer-to-peer lending is also called person-to-person lending or social lending, and companies that make peer-to-peer loans are commonly called peer-to-peer lenders or marketplace lenders.
Some marketplace lenders place restrictions on what types of people can invest in their loans. Some companies, such as LendingClub and Prosper, are open to everyone, so long as you meet the account minimums. Other companies may only be open to accredited investors or qualified purchasers. Individuals are considered accredited investors when they have personal income of $200,000 ($300,000 for joint) for the last two years, or a net worth exceeding $1 million, either individually or jointly. Qualified purchasers must meet even greater requirements than accredited investors, owning at least $5 million in investments. Finally, some marketplace lenders are only open to institutional investors, such as hedge funds, commercial banks, pension or endowment funds and life insurance companies.
Marketplace lenders generate revenue by charging fees to borrowers and taking a percentage of the interest earned on the loan. Most commonly, lenders will charge origination fees, typically 1% to 6% of the loan amount, and late payment fees to borrowers. On the investing side, lenders will take a percentage of the interest accrued on the loan. LendingClub, for example, takes a 1% fee of each payment amount. If a borrower makes a $200 payment on a loan, LendingClub would take $2 before passing the payment on to investors.

Pros and Cons of P2P Lending

Peer-to-peer loans are not for every borrower or every investor, as they carry a unique set of advantages and disadvantages.

Pros Cons
Borrowers
  • Fast, online experience
  • Lower range of interest rates
  • Fixed monthly payments
  • Can check rate without affecting credit score
  • Credit requirements may be less strict than at a bank
  • Most loans are unsecured
  • Flexible use of funds
  • Automatic repayment
  • No prepayment penalties
  • High interest rates up to 36% if you have below average credit
  • May be unable to qualify if you have a credit score below 630
  • Cannot usually borrow more than $35k to $40k
  • Some sites have high fees, including origination fees up to 6%
  • Missed payments will hurt your credit score
Investors
  • Higher yield than savings or CD accounts
  • Access to alternative investments outside of stocks and bonds
  • Most platforms allow you automatically diversify your loan portfolio
  • Sense of community or social good by lending directly to peers
  • Risk of losing your money if borrowers default
  • Not FDIC insured like a savings or CD account
  • Less liquidity than stocks or bonds because of long time horizons (three to five years)
  • Relatively new industry could mean more instability
  • Some sites are only available to accredited investors

P2P Lenders

We’ve compiled a list of marketplace lenders in the U.S. that are available to investors. The major lenders available to everyday investors are LendingClub and Prosper.


Lender Types of P2P Loans Who Can Invest?
LendingClub Personal loans, business loans Everyone
Prosper Personal loans Everyone
Upstart Personal loans Everyone
Kiva Microloans (non-interest bearing) Everyone
Peerform Personal loans Accredited investors
Funding Circle Small business loans Accredited investors
StreetShares Small business loans Accredited investors
ApplePie Capital Small business franchise loans Accredited investors
SoFi Personal loans, student loan refinancing Qualified purchasers
Avant Personal loans Institutional investors

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