If you’ve been looking around for loans but are not satisfied with or cannot obtain a traditional loan through a bank, one popular alternative is a peer to peer loan. The application process is a bit different, but with this guide, you’ll have no trouble applying.
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Understanding Peer to Peer Loans
A traditional loan is one where the financial institution issues the loan and collects the interest. With this type of loan, investors finance it and your interest is their return. You apply for the loan through an online peer lending site. The platform assigns you a risk score based on your credit history, income, and other financial information.
Limits and Amounts
You can get a loan for anywhere from $1,000 to $35,000. The maximum amount you’re able to borrow will depend on your credit score and your income. Two of the most popular peer lending sites are LendingClub and Prosper. Moreover, you can figure out what your monthly loan payment would be with this calculator.
The peer lending site puts your loan request up on its online marketplace. Here, investors can find it and choose to fund it. For this service, the peer lending site takes a small fee. It ranges from 0.5 to 5 percent of the loan amount. Moreover, it automatically deducts this fee from your loan.
What Types of Peer to Peer Loans Are There?
You can use a peer to peer loan as a personal loan, a business loan, an auto loan, or much more. When you apply for the loan, you include in your request how you plan to use the money. Investors can see this information when they decide if they want to fund your case.
There are two ways in which loans can work. With the first, the lending site sets a certain interest rate for your loan based on your risk score. As per the second, investors can bid on your loan request, with the investors who bid the lowest interest rate getting to fund your loan.
How to Apply for a Peer to Peer Loan
The application process for a peer to peer loan takes place entirely online. While it will vary slightly from site to site, peer lending sites tend to have very similar application procedures.
From the site’s main page, go to the application page. Some sites will have a Check Rates button, and if so, this is what you should click on to start your application.
A standard loan application will require the following information from you:
• Your requested loan amount
• The purpose of the loan
• Your email address and a password to set up your account
• Your full name
• Street address
• Your employment status
• Your date of birth
Once you submit this information to the peer lending site, they will run a soft credit check. It doesn’t affect your credit. The company uses this information to determine your risk score. Then, it provides you with an annual percentage yield (APR) estimate based on the risk score it has given you.
The benefit of this is that you can apply at multiple peer lending sites. Moreover, you can compare what type of interest rates they’re offering you. Therefore, you can go with the company that offers the lowest rate.
When you want to complete the loan process, you will need to fill out an application with more detailed information. Again, the required information depends on the peer lending company. A representative from the company will get in touch with you over the phone to verify your information.
The company will then run a hard credit check on you, which can temporarily affect your credit score. After this check is complete and they have verified all your information, your loan request will go live on the site’s marketplace.
At that point, whether your loan receives funding and how quickly funding occurs is entirely dependent on investors. Most peer lending sites have very active marketplaces. Therefore, it doesn’t take long for loan requests to receive funding.
Each site has a minimum amount that your loan must reach in funding for you to receive it. 70 percent is the standard amount. Also, you can choose to accept the loan if it isn’t completely funded.
After your loan has all its funds, it takes three to five business days for the money to reach your bank account directly.
How Does Repayment Work?
The standard term length of a peer to peer loan is between three and five years. You make your payments in monthly installments.
Your APR and origination fee depend on the grade that the peer lending site assigns you. Most use a letter grading system. AAA indicates the highest possible grade. They steadily decrease from this point into the B, C, and D range.
If you have an excellent credit score and get a high grade, then you may be able to secure a loan with an APR of 6 to 7 percent. Also, you can get an origination fee from 0.5 to 1 percent. At the other end of the spectrum, borrowers with poor credit scores can expect an APR up to 30 percent. Also, they can have an origination fee of up to 5 percent.
FAQs We Know You Have
Q: Are there differences between the peer lending sites available?
A: With all the peer lending sites out there, you’re probably wondering if it matters which one you choose. There are sites that cater to certain types of borrowers. Some tend to accept borrowers with high credit scores, while others have higher interest rates but accept borrowers with poor credits. With a quick search, you can find the minimum borrower requirements of each site.
Q: Does your location factor play a part with your peer to peer loan?
A: Even though peer lending takes place online, regulation still occurs at state level. The industry has been around in the United States since 2006. Therefore, at this point, it’s widely accepted. However, the companies that are available to you will depend on where you live.
Banks and credit unions often have strict requirements to apply for a loan. The application process is usually lengthy, and you may get rejected if you don’t have an excellent credit score. The peer lending industry provides a reasonable alternative that’s beneficial for both borrowers and the people investing in these loans.
It’s hard to beat the convenience of a peer to peer loan. The initial application takes only five to 10 minutes to complete. Then you can decide if you want to continue based on the interest rate. Once your loan is funded, you’ll have the money within a couple days. It’s a versatile type of loan through which you can get the amount you need and then pay it back over a term of up to five years.