Peer-to-Peer Lending Explained

For those who are having trouble getting the money they need and cannot qualify for a traditional loan, peer to peer lending may be the answer. However, before running to the nearest peer to peer lending organization you should understand the way a peer to peer loan works. When you understand these loans, you can determine if one is right for you.

What is a Peer to Peer Loan?

A peer to peer loan is exactly what it sounds like. Two people, one borrower, and one investor (lender) come together through a peer to peer lending website or organization to discuss what the loan is for and the terms of the loan. Private investors grant people the loans, based on whether or not they feel the investment is worth the risk. Because borrowers are dealing with individuals, they are more likely to get a loan this way, and just because one person turns them down does not mean they all will. Depending on the company facilitating the loans, the borrower may have to apply while different investors bid on the loan. When the loan gets enough bids, the money is deposited into the borrower's bank account and monthly payments are automatically deducted from the account. Instead of asking someone you know for a loan, you are asking a stranger for a loan, but in a business arrangement manner. These loans may be secured or unsecured, depending on the arrangements made between the borrower and the lender. Most loans top out at $25,000 and require a purpose to be stated before the loan will be granted.

Where to Get a Peer to Peer Loan

The beauty, and potentially the curse about a peer to peer loan is they aren't funded by banks. While this is a nice factor for most, it makes them more difficult to locate. The easiest way to find peer to peer loans are through websites such as Prosper, where both borrowers and investors can create accounts, apply for loans, and bid on loans.

Why Choose a Peer to Peer Loan?

Peer to Peer loans cost less because they directly connect two people, cutting out the bank in the middle. Depending on your credit score and the purpose of the loan, they may be easier to secure, or secured at a lesser interest rate than a bank loan. For investors, however, there can be quite a bit of risk involved, considering they may lose all their capital they have invested if the borrower fails to make his or her payment commitments.

It is a good idea to check your credit report and score before attempting to get a private loan like this, because it will give you a good idea of the interest rate you should offer. Some organizations allow the interest rate to be "bought down" by investors who believe the interest rate should be lower than the borrower is willing to pay.


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