Pros (and a Few Cons) of Peer-to-Peer Lending

Everyone has moments in life when they urgently need a large amount of money – when there is no time to make a savings plan and wait until the required amount is accumulated. Borrowing money can either be a lengthy process full of paperwork , delays, and credit checks, or it can be quick and easy, like with credit cards and cash advances, but with high interest rates.

And that’s if you can even get a traditional loan or line of credit. In such circumstances, many people turn to personal loans from friends and relatives, but this is also a way to potentially damage relationships . Or some desperate people might head to a payday lender, which is a monumentally bad idea. But there is another option that might suit you: peer-to-peer (P2P) lending.

What is peer-to-peer lending?

Peer-to-peer lending involves borrowing money from one or more private investors rather than from a bank or other institution. It’s a kind of crowdfunded personal loan: instead of borrowing, say, $5,000 from a bank, a payday lender, or your uncle, you borrow it from strangers. This is usually the case for platforms like Prosper or Funding Circle , where investors choose the loans they want to fund.

As a rule, loans are financed by several investors at the same time, but the borrower makes a single monthly payment, which is then divided among the investors. They make money by charging interest and you meet your short-term financial needs without having to deal with a bank or other financial institution.

How P2P loans work

Getting a P2P loan is a fairly straightforward process, but the specific steps vary by platform:

  1. Determine the right platform . Different platforms offer different rates and have different minimum and maximum amounts you can borrow (typically between $40,000 and $50,000).
  2. Fill out a preliminary application. This is similar to any loan application and you will be asked why you need the money and will provide some personal information such as pay stubs and tax reports to show proof of your income.
  3. The platform will run your credit score and review your application. Based on this information, you will be assigned a rating that investors will use to decide if they want to lend you money and on what terms.
  4. Review offers. One or more investors may want to fund all or part of your loan. You will have the opportunity to review the proposed terms and conditions and decide if you want to continue with them. Once your loan has received final approval, you receive your funds and the repayment schedule begins.

Keep in mind that most of these loans will charge an issuance fee just like a traditional loan. Typically, these fees are around 5% (again, this depends on the amount of the loan). In other words, if you borrow $5,000, the platform will only deposit $4,750 into your account and the rest will be taken as a fee. This means that you may need to adjust your borrowing amount to make sure you get the amount you really need.

Why P2P?

There are many reasons why you might find a P2P loan an attractive option:

  • Convenience. P2P loans are usually completely online, so you don’t have to show up at a bank or credit union to sit and stare at a loan officer frowning at a computer screen. You fill out an online application, upload documents, and view your options entirely online.
  • Simplified statements. If you’ve been denied a more traditional loan because your credit score and history are sketchy, you may have better luck with a P2P platform. Investors can set their own level of acceptable risk for their money; if there are enough investors on the platform who don’t mind your financial mess too much, you’ll get that loan.
  • Better conditions. There is no guarantee, but often you can get better loan terms through P2P platforms. Interest rates can be lower than standard rates offered at banks because investors pool smaller amounts of money individually and can tolerate lower rates of return.

It is important to note that P2P loans also have some potential downsides:

  • Higher fees. P2P loans are not automatically better than bank loans or other traditional loans. They can be structured differently and you may end up paying more in fees on your loan than you would at a bank, so be careful.
  • Less maintenance. Banks and credit unions usually have entire departments dedicated to servicing loans, and if you have trouble repaying a loan, you can often get amazing help because the bank will prefer to negotiate debt collection or insolvency. The P2P lender is decentralized, which can mean less support and much faster collections.


Like everything else on the Internet, the P2P ecosystem is rife with scammers who take advantage of desperate people. For lenders, the risk is to wake up one day to find that the platform has shut down and gone with the money they invested. For borrowers, the risk is more related to phishing – getting your personal and financial information to create fraudulent accounts. You register on a P2P platform hoping to get a small loan, but instead your identity is stolen.

There are several main ways to avoid this fate:

  • Due diligence. Start by looking at various P2P lending platforms and avoid those that have bad reviews or no reviews at all. Avoid P2P platforms that are less than three years old: Most troubled P2P lenders fail and close within a year or two .
  • Licensing. P2P lending platforms are government regulated and must be licensed in the state or country in which they operate. Make sure the platform you are considering is properly licensed and be wary of P2P lenders operating outside of countries that do not have the best financial regulation.
  • Moved accounts. Check where the platform carries out its own banking operations. If the platform has its offices in the US, but banks, for example, through Venezuela, this is a red flag.
  • Clear communication. Fraudulent platforms often fail to provide you with a written loan agreement – ​​you must be able to review the terms of the loan you are agreeing to before committing.

Borrowing money from a peer-to-peer lender can be a good option if you’re having trouble getting money through more traditional means. The key is to make sure you’re actually getting a better deal – the paperwork and effort of a traditional loan can be worth it if you get a better rate from a more reliable lender.


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