How Peer Loan Works – Student Loan Hero


September 24, 2020

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Peer-to-peer loans connect consumers directly with investors offering loans, eliminating the middleman of a bank or other lender. Peer-to-peer (P2P) lending markets such as LendingClub and Prosper allow individuals to easily access loans without resorting to a third-party financial institution.

This approach to borrowing can be beneficial if it offers better rates on a loan, but it is always worth shopping around for a few lenders to find your best loan that best suits your needs.

Let’s answer the following key questions about peer-to-peer lending:

What is the loan between individuals?

Traditionally, if you needed a loan, you would go to a bank or other financial institution to see how much money they would allow you to borrow. In the P2P loan system, loans are made online directly by individuals, investors or businesses.

Each lender will have their own stipulations on how much you can borrow and the purpose of the loan, and you will need to go through an application process.

How does the loan between individuals work?

Peer-to-peer lending works by applying for a loan on a P2P marketplace website such as LendingClub. Investors on these platforms then offer to lend you money under certain repayment conditions.

The platform assesses your level of risk using factors such as your credit score. Your creditworthiness will determine your interest rate and your loan options, often in a matter of minutes.

Investors simultaneously present their loan offers to you. Once you have chosen your loan, the lender will send the funds directly to your bank account. You then make monthly payments to repay the loan on the agreed schedule and interest rate.

The loan can be funded in a day or in a few weeks. There is usually no penalty if you repay early to get out of debt faster and save money on interest.

Unsecured personal loans are the most common type of P2P loan. You can usually use the money to buy a new car, make improvements to your home, consolidate credit card debt, or finance a new business.

How to apply for a P2P loan?

The process for requesting a P2P transaction takes place online and can usually be completed in a matter of minutes. The process will vary depending on the requirements of each lender for different types of loans.

To borrow money, you usually need to be at least 18 years old, have a valid social security number and bank account. You will also need to provide personal information such as your date of birth and address. For some types of loans, like the ones below, you may be asked to provide additional data.

  • Personal loans. A lender might consider your credit score, debt-to-income ratio (DTI), employment status, salary, and other financial factors to determine your eligibility and interest rates. The P2P lender may also want to know the reason why you need the loan and ask for additional information, such as your unpaid debt, mortgage payments, and education history.
  • Business loans. A lender might ask you to provide information on factors such as the time you have been in business, your personal and professional credit scores, your income and profits, your tax returns, your balance sheets, and your service coverage ratio. debt, which is a measure of the company’s cash flow.

What are the advantages and disadvantages of the P2P loan?

Like any financial product, peer-to-peer lending has a number of potential advantages and disadvantages for consumers. Here’s a quick look at either side of the P2P coin:

Benefits of P2P loan

  • Lower interest rate potential. The P2P market is competitive, so you could potentially get lower interest rates than a bank or other financial institution. In addition, the transaction is between two people, so all the interest goes directly to the investor, who has less overhead, allowing him to charge lower rates.
  • Simple and fast process. The application process usually takes a few minutes, and options are presented to you just as quickly. Then the funds can be deposited directly into your account within days.
  • Bad credit doesn’t necessarily disqualify you. While P2P lenders take your credit score into account, they might be more lenient with your credit history. You will likely be faced with higher interest rates with a poor score, but your application might not be rejected.
  • Debt consolidation and refinancing. If you have high credit card debt, you could face an APR over 20.00%. A P2P loan with a lower interest rate could be a good option to pay off the debt. It could also help you if you are looking to consolidate or refinance other types of high interest loans.
  • Fixed monthly payments. P2P loan repayment plans usually have fixed rates, so your monthly payment stays the same, so you can budget your finances properly.
  • No prepayment penalty. You don’t incur any penalties for prepaying your loan, which can help you save money on interest charges over time.

Disadvantages of P2P loan

  • There may be fees for borrowers. LendingClub personal loans, for example, come with origination fees of 2% to 6% of the loan amount. This can be higher than the fees you would find on personal loans from a bank.
  • The interest rate could be high. While some lenders may offer a lower interest rate, others may charge a much higher rate than on a personal loan from a traditional source. That is why you should research and consider multiple sources when borrowing money.
  • Lack of regulation could hurt. Although P2P companies try to offer protections to customers, the industry itself is relatively new and therefore prone to problems resulting from a lack of regulation. This can endanger both borrowers and lenders.
  • Service not available everywhere. Not all states allow P2P loans, so check to see if they are available to you.

Is a P2P loan right for you?

If you are looking for a loan to pay off credit card debt or finance a large purchase, a P2P product can be a quick, easy, and cost effective option. But just like when applying for a private student loan or personal loan, it’s important to understand how peer-to-peer lending works and to review offers from multiple lenders to find your best rates.

A lack of regulation for the relatively new P2P lender market could mean that borrowing from a traditional lender might work better for your financial situation. Evaluate the pros and cons before making a decision and make sure you have the funds to pay off any loans you take out.

Rebecca Safier contributed to this report.

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How is the student loan hero paid

Student Loan Hero is indemnified by the companies present on this site and this compensation may have an impact on how and where the offers appear on this site (such as the order). Student Loan Hero does not include all lenders, savings products, or loan options available in the market.

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Student Loan Hero is an advertising-supported comparison service. The site presents products from our partners as well as from institutions that are not advertising partners. While we endeavor to include the best offers available to the general public, we do not guarantee that this information represents all products available.

How is the student loan hero paid

How is the student loan hero paid

Student Loan Hero is indemnified by the companies present on this site and this compensation may have an impact on how and where the offers appear on this site (such as the order). Student Loan Hero does not include all lenders, savings products, or loan options available in the market.

Advertiser Disclosure

Hero Student Loan Advertiser Disclosure

Student Loan Hero is an advertising-supported comparison service. The site presents products from our partners as well as from institutions that are not advertising partners. While we endeavor to include the best offers available to the general public, we do not guarantee that this information represents all products available.

PRICES (APR) Amount of the loan
4.99% – 19.63%1 $5,000 at $100,000
4.37% – 35.99% $1000 at $50,000
5.94% – 35.97%* $1000 at $50,000
99.00% – 199.00%2 $500 at $4000
5.99% – 24.99%3 $5,000 at $40,000
9.99% – 35.99%4 $2,000 at $36,500

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2 Includes AutoPay discount. .
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