What are Peer to Peer Loans?
Traditional loans are offered by banks and online lenders, but with peer to peer loans, those loans are backed by individual investors. The advantage of applying for a P2P loan is that there may be less strict criteria to qualify than there is with a traditional loan, as individual lenders can set their parameters for approving an applicant.
How Does Peer to Peer Lending Work?
Peer to peer lending works similar to how other loans work: you apply online, compare your options, then choose what works for you.
Once your application is submitted, you will be matched with the lenders whose criteria you meet. You can choose from among several loan offers to get the loan with the most favorable terms and interest rate for your needs.
Typically, applying for a P2P loan results in a soft pull on your credit score, though once you sign the loan agreement, that will become a hard pull.
Reasons to Get a Peer to Peer Loan
So why consider a peer to peer loan over a traditional loan? There are several reasons.
- You don’t qualify for a loan elsewhere. You might have bad credit or a derogatory mark on your credit report that keeps you from qualifying for a traditional loan, though that may not be an issue with P2P lending.
- You can choose the terms that work for you. Most P2P sites provide you with multiple loan options so you can compare rates and terms.
- They can be used for a variety of purposes. P2P loans can be used for home remodels, debt consolidation, refinancing loans, weddings, vacations, cars, new babies…you name it. Typically there are few restrictions for how you can use a P2P loan.
- Paying on time may improve your credit. When you make your monthly payment on time and reduce your overall debt, you may see an increase in your credit score, which can help you qualify for lower rates on loans in the future.
- You can get your money fast. Most P2P lenders work online and their applications are short and sweet. Additionally, they’re more likely to approve your application within a day or so, and fund the loan just as fast.
How to Get a Peer to Peer Personal Loan
Though the application process varies by lender, these are the general steps you can expect when applying for a peer to peer personal loan.
- Step 1: Research Requirements: Each P2P lender will have different requirements to qualify for a loan. Some may require a certain credit score or annual income. Narrow down your search to those that you qualify for financing with.
- Step 2: Gather Required Documents and Info: Each lender will ask for certain things, such as a copy of your driver’s license, your credit score, your social security number, and personal details. You may also be asked to provide paystubs or bank statements.
- Step 3: Apply for the Loan: Once you have everything you need, start your application. Most P2P lenders have very brief applications, and if you’ve already gathered the required documents, you should be done within minutes.
- Step 4: Wait for a Decision: The lender will review your application and provide you with a decision within a few business days.
- Step 5: Review Loan Offer: This is your opportunity to review the amount you are approved to borrow, as well as the interest rate you will pay and the loan repayment period. If you agree with all, sign the loan agreement and return to the lender.
- Step 6: Get Paid: Many lenders will fund your loan in as little as one business day. It will be deposited into your bank account.
Alternatives to Peer to Peer Loans
You’re wise to explore all your funding options before applying for a loan. In addition to peer to peer loans, you have other options for financing.
- Traditional Loans: If you have good credit, you may qualify for a loan with low interest through a bank or traditional lender.
- Alternative Loans: Online lenders may also offer flexible criteria to qualify for personal loans.
- Line of Credit: For those who want some money now and more later, a line of credit can provide access to funds over time. Only pay back what you borrow.
- Credit Card: While it doesn’t provide cash, a credit card can allow you to purchase what you need, then pay off the balance.
Conclusion
Peer to peer loans offer financing solutions to those who might not otherwise qualify for loans through banks and online lenders. With flexibility around requirements like credit score, you may find more options to get the cash you need to remodel your home, consolidate debt, pay off credit cards, take a vacation, get married, or even buy a car. No matter what your credit score, you may be able to find a peer to peer lender who is willing to loan you money at an affordable interest rate. Paying that loan off on time each month may also help you build your credit score so that you qualify for lower interest rates on financing down the line.