If you need a loan, one option that provides an alternative to banks and credit unions is a peer-to-peer (P2P) loan. With this type of loan, you apply online with a P2P lending company, which facilitates the loan. The company assesses your financial profile to assign you a risk score, and then puts your loan request on its marketplace. Investors can choose to fund your loan. There are a few notable pros and cons with P2P loans.
Reasonable Interest Rates
P2P loans tend to have moderate interest rates, although this is heavily dependent on your credit score and income. Interest rates won’t be as low as they would be if you went through a bank or credit union, but it’s easier to get approved, and rates are still much lower than what they would be with short-term loans, such as title loans and payday loans. The lowest interest rates available with P2P loans are about 7-percent annual percentage yield (APR), while the high end is 24 to 36-percent APR. The average is 14.7 percent through The Lending Club, one of the largest P2P lending companies.
Extra Costs
While interest rates aren’t bad with P2P loans, you need to factor in their fees. P2P loans typically have either an origination fee or a closing fee. While the name varies depending on the P2P lending company you choose, these are the same type of fee. The P2P lending company charges this fee so it makes money on the transaction, since the interest that you pay goes to the investors. This fee may be anywhere from 0.5 percent to 5 percent of your loan amount, so on large loans it can add up.
Flexible Terms
You have flexibility with how long of a term you get when you take out a P2P loan. Terms are usually at least one year, and it’s common to get a loan with a three to five-year term. This is good for you as a borrower, because you have lower monthly payments and more time to pay back your loan. If you think that you’ll be able to pay back your loan before the end of the term, make sure that you choose a loan provider that doesn’t charge prepayment penalties.
Convenient Application Process
You can expect the application process for a P2P loan to be faster than it would be for a more traditional loan, such as one obtained through a bank or credit union. While applications for those types of loans can take well over a week to process, with a P2P loan, you can apply online within about 10 to 20 minutes. Once the P2P lending company confirms your information, it can put your loan on the marketplace. Funding does depend on investors choosing to fund your loan, but when that happens, you can usually expect to receive your money within three to five business days.
P2P loans are one of the better loan options on the market. They’re faster than bank loans, although they also typically carry higher interest rates. For this reason, it’s smart to apply for a bank loan first and see if you get approved. If not, give P2P lending a try, as you can often secure a loan at a reasonable interest rate on a term that fits your needs.