How Does Peer-to-Peer Lending Work?

There are reasons why you might not want to go to a bank to get a loan. Maybe your credit isn’t very good, maybe you only need a small amount, or maybe you’re looking to make an investment that the bank won’t support. Some people look for hard money investments. Others might turn to high interest payday loans. Some might even dip into their own credit cards to get this money. But there are other options. One of the most interesting technological advances that the Internet has brought to financing is a concept called peer-to-peer lending. But what is peer-to-peer lending, how does it work, and why should you look into it?

What Is Peer-to-Peer Lending?

Peer to peer lending, or P2P, is an alternative to borrowing from financial institutions. You don’t borrow directly from an institution; instead, you borrow from an individual or a pool of individuals who lend money to those who meet the requirements.

Lenders can sign up to a P2P lending network, with the intention of earning a return from lending the money to borrowers. This is a form of crowdsourced financing and took off mostly in the 2010s. Keep reading this blog on Peer-to-Peer lending work.

Who Is Peer-to-Peer Lending Best For?

P2P loans are great for people or businesses looking for relatively small loans. Different networks have different minimum and maximum loan amounts, so you will want to check with the P2P lending network.

Generally, P2P loans are not meant for those with bad or no credit. Most networks have a minimum FICO score requirement of 600 and a low debt-to-income ratio. However, there are some networks that specialize in riskier loans for investors that are seeking higher returns.

On the lending side, P2P lending can provide investors with returns that are not very common in other debt markets. They also present an opportunity for investors who want to lend small amounts to a large variety of people for various reasons.

How Do You Get Started?

I Want To Borrow

To start borrowing from a P2P lending network, all you gotta do is sign up to one. We’ve listed a few of the most popular P2P lenders where you can instantly create an account.

P2P lending networks make it easy to get your money. Typically, all you gotta do is add your bank account information and you get the money directly deposited into your account.

I Want To Lend

P2P lending networks make lending quite easy. Simply go to their website and apply to become a lender. You will have to go through an application process and your application is not guaranteed to be accepted.

Some networks may require you to be an accredited investor; that is, an investor who meets certain qualifications such as an income of over $200,000 or a net worth (not including primary residence) of $1 million. To be accepted on one of these networks, you simply need to provide proof that you meet the qualifications.